Do You Know What a Second-Chance Auto Loan Is?

Car buyers with poor credit might find it difficult to obtain financing. A second-chance auto loan might be an option if you need to buy a car but are limited in terms of credit. What is a second-chance auto loan? Learn about the requirements for a second-chance auto loan, including how to apply for one and when you should consider this type of loan.

Compare auto loans here:

What Is a Second-Chance Auto Loan?

A second-chance auto loan is a type of financing lenders offer buyers with poor credit. Also known as subprime auto loans, second-chance auto loans are often buyers' last effort at getting funding for a new car.

Lenders look at more than credit with second-chance auto loans. They might consider things like:

• Down payment: The more money you put down on your car loan, the more likely the lender will approve your application. A higher down payment means the lender doesn't have to lend as much. It also results in lower monthly payments for the borrower, which might be easier for them to make.

• Income: A high income can sometimes make up for a bad credit score. Having a high income or low debt-to-income ratio proves you can make your car loan payments.

• Debt: Lenders will also look at your existing debt when determining your eligibility for a second-chance car loan. Having a lot of debt can reduce your chance of approval because it shows you have other obligations. Potential lenders will review the debt listed in your credit report.

• Payment history: Proving you're actively improving your credit score might qualify you for a second-chance car loan. Even if you had bad credit previously, avoiding new late payments can help you get a second-chance loan.

Some lenders offer guaranteed loans, which means they promise loan approval. These often come at a rate that's much higher than the average interest rate.

Who Qualifies for a Second-Chance Auto Loan?

Borrowers usually turn to second-chance auto loans when they have bad credit, or anything lower than a 580 credit score. You might qualify for a second-chance loan if you're denied a traditional auto loan.

Second-chance auto loans are usually divided into deep subprime or subprime loans. A deep subprime loan covers credit scores between 300 and 500, and a subprime loan covers credit scores between 501 and 600. Car buyers who have previous repossessions or past bankruptcies might benefit from second-chance auto loans.

What to Expect with a Second-Chance Auto Loan

If you're considering a second-chance car loan, do your research first. Second-chance car loans do come with risks, including:

The Lender Might Require a Higher Down Payment

Many second-chance car lenders require a higher down payment to reduce their risk. The good thing is a higher down payment can reduce your monthly payments and make your loan more affordable. If possible, it might even be a good idea to make a bigger down payment than what the lender requires.

Be sure to factor in precomputed interest, giving you a full monthly payment estimate. You can make the best financial decisions when you have all the information you need.

The Lender Will Likely Charge You a Higher Interest Rate

Most second-chance loans come with higher interest rates. The interest rate is how much the lender charges you to borrow money. Subprime lenders usually charge higher interest rates because they're entering into a higher-risk agreement. Doing your research and comparing interest rates among lenders is always a good idea. Consider all your loan options to find the best option.

Your Credit History Will Affect Your Rates

Your credit history and score both affect your interest rate. Subprime lenders typically charge rates based on a borrower's credit. Borrowers with stronger credit might save a little each month with a lower interest rate. Choosing a car within your budget can offer you added financial protection because you know you can afford the monthly payments.

Your Loan Is Secured with Your Car