Second chance loans can describe either subprime loans in general or a kind of short-term subprime loan used to rebuild bad credit scores. Since auto loans tend to be long term, second chance auto loans are usually synonymous with bad credit or subprime auto loans. In general, these car loans are more expensive and come with harsher loan conditions than their prime or super-prime counterparts, but are easier to obtain for people whose credit has already been declined.
You can secure second chance auto financing from either a financial institution or through in-house financing. Some dealers and financial institutions offer both prime and second chance auto loans, but there are also auto dealerships that specialize in financing and selling to customers with poor credit. You will find it even easier to get an auto loan from these second chance auto dealerships than from other subprime lenders, but there is a cost: higher interest rates and harsher loan conditions. Furthermore, second chance auto dealers usually limit their customers to used vehicles with high mileage.
Tips For Second Chance Credit Applicants
Most people take out second chance auto loans because there are no other car financing options available to them, typically due to their poor credit ratings. If you are caught in this situation, there are steps that you can take to reduce your costs and the risk of default. First, you should shop around and compare your loan options before taking the plunge. Second, you should restrict your choice of automobile to older and thus cheaper vehicles. As with any high mileage vehicle, you should have a mechanic ensure that the vehicle is usable, but your first priority should be saving money on your upcoming purchase. Third, you should save up before taking out a second chance auto loan so that you can make a big initial down payment on the vehicle. These measures will save you money over the long run by reducing the principal and possibly getting you a lower interest rate.
Improving Your Credit Score
You may also want to take out such an auto loan to boost your credit score, so you can get a better loan in the future. Financing your car via second chance auto sales and then making regular payments can help your credit score in a couple of ways. First, taking on debt and keeping up with the payments demonstrates that you are a creditworthy customer. Second, credit bureaus give people with more diverse mixtures of debt higher credit scores. For example, a person with both an auto loan and a credit card will have a higher credit score than the same person with only a credit card. Of course, taking out an auto loan will only boost your credit score if you are diligent about making your payments on time.
Once your credit score has recovered, you can then refinance your second chance auto loan. Refinancing simply means replacing an old loan with a new loan under different terms and conditions. If your credit score has recovered, you should be able to replace your subprime auto loan with a prime auto loan and thereby stop paying high interest rates.