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Second-chance car loans: What they are and how to get one

Close up of several cars on a lot with sale on the windows
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Close up of several cars on a lot with sale on the windows
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If you have poor credit history and are struggling to gain auto loan approval, a second-chance auto loan can be an option. Also known as subprime car loans, they typically carry higher interest rates, monthly payments and fees, so consider the benefits and drawbacks of these loans before applying.

What are second-chance auto loans?

A second-chance auto loan is a car loan offered to drivers who are struggling with credit and can’t get approved for a traditional auto loan. They are also referred to as subprime auto loans or subprime car loans. Subprime is defined by Experian as a credit score of 600 or less.

The structure of a second-chance auto loan varies greatly between lenders. Some lenders require a minimum credit score and may have an income requirement. Others may not have a minimum credit requirement but have an income requirement and limited loan options.

You will almost certainly have to pay a higher interest rate with a second-chance auto loan. As an example, an excellent credit score nets an average interest rate of 2.93 percent, whereas subprime borrowers average 9.75 percent, according to Experian. This is because lenders are assessing you as a higher risk of default.

Where to get second-chance auto loans

While not all lenders offer these types of loans, there are a few places where you can find one.

Dealerships

Some dealerships may be willing to offer a second-chance loan. In general, “buy here, pay here” (BHPH) lots cater to customers with no credit or low credit scores.

Check local dealerships in your area to find out if one has relaxed credit requirements that meet your needs. It’s important to note that the current market for buying cars is already a tough one, and your selection will likely be severely limited.

Finance companies

There are finance companies that offer second-chance auto loans. All lenders are different and they have specific requirements that they require customers to meet in order to qualify.

When looking into subprime lenders, however, be weary of any deals that seem too good to be true. You may wind up falling victim to a yo-yo scam or other car-buying scam and end up losing money, time and the car you’re trying to buy. Check customer reviews and thoroughly vet any potential lenders before you apply.

What to consider before taking out a second-chance auto loan

There are several factors to consider before taking out a second-chance car loan.

Can you afford the monthly payments?

A second-chance car loan includes higher monthly payments because the lender assumes you will have a more difficult time paying them off. That higher risk often results in higher interest rates.

What are the fees?

It’s important to investigate all fees, including application fees, finance fees, prepayment fees and any monthly account fees. Do not sign the paperwork until you know exactly what you will be paying.

Will you build credit?

If you are planning to buy a car as a first step to improving your credit, a second-chance auto loan isn’t the way to go. These loans sometimes do not report to credit agencies.

How much of a down payment is required?

Some lenders require a minimum down payment, which you can usually pay with a cashier’s check, bank check or cash. If the down payment required is out of budget, you may need to shop for an alternative.

How long is the loan?

Second-chance auto loans can come with longer terms. While a longer term means a lower monthly payment, it also means more interest paid over the life of the loan.

Alternatives to second-chance auto loans

If you’ve been turned down for a second-chance car loan or can’t qualify for a decent rate, consider other options.

  • Add a co-signer. If you have a co-signer with excellent credit and a stable income, the lender may approve your application. However, if the loan is not paid, your co-signer will be on the hook for repayment.
  • Check your local credit union. Many credit unions offer car loans to those with low credit scores. If you’re already a member of a credit union, make an appointment to talk with a loan officer. You may be able to get a fair rate on a decent amount.
  • Improve your credit. If you have time to wait, improving your credit may help you find a fair loan. Removing negative items from your credit report can help improve your credit score but can take up to 30 days.
  • Buy with cash. This option also requires you to not be on a tight schedule when it comes to buying. But if you can afford to save up, you can avoid financing and with it avoid application standards and interest.

The bottom line

A second-chance car loan can be a way to get behind the wheel if your credit score is preventing you from being approved for a more traditional auto loan. Read over the terms closely and prepare to spend more money than one might for a traditional auto loan.

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