A second chance loan is also considered as a kind of subprime lending. These types of loans usually charge a very high interest rate. The reason behind these increased amounts of interest rates is the high credit risk associated with these borrowers. When the rates are high, then only those borrowers will buy loans who have some lower risk chance.
Let’s discuss in more detail about this type of loan and the borrowers who can buy it.
Table of Contents
- 1 Second Chance Loan
- 2 Pros And Cons of Second Chance Loans
- 3 How Can I Apply For A Second Chance Auto Loan?
- 4 Bottom Line
Second Chance Loan
A second chance is the loan for those borrowers who have years of bad credit history which has negatively impacted their overall credit score. It is not easy for these borrowers to easily qualify for conventional financing.
Second Chance Financing Types
Most people who offer second chance loans are those with great experience in the subprime market. Most subprime loans have a unique maturity term like a 30 year mortgage. Similarly, the second chance loans that they offer also have a typical maturity term. However, these loans have major use in financing autos, vehicles, etc for a short term period.
People who borrow second chance loans can get their money. After that, they can start paying all monthly installments on time. These efforts will impact directly on the credit history which will then start to improve.
Once you have a good credit history record, you may become eligible to obtain a new loan with the terms of loan as per your needs and requirements.This will help such borrowers in paying off their second chance loans. If the interest rate on a second chance loan is high, it gives borrowers an opportunity to refinance as soon as they are capable of.
Another type of a second chance loan comes with a very short term, sometimes as little as a week or two. The payback process is therefore different from other loans.
Instead of paying back your monthly installments over a longer period of loan, you have to pay the full amount at the end of the period. The amount that you can borrow through these loans are really small like $400. Mostly, the payday lenders who have expertise in high-interest and short-term loans offer these types of second chance loans.
Pros And Cons of Second Chance Loans
If you are a borrower with bad credit history then there is no denying the fact that a second chance loan has major advantages for you. They can fully assist you in redeveloping your credit score all the way from a negative score to positive one. Also, these loans are probably your only choice whenever you have to borrow money.
However, most borrowers tend to totally forget about the significant risks that are involved with these kinds of loans. Let’s look at the risk possibilities in more detail:
- When you borrow a second chance loan, you cannot repay the loan or request for any other financing to use in place of the loan. For example, most lenders give second chance loans in the form of an ARM i.e. adjustable rate mortgage. This is called as a 3/27 ARM.
- The mortgages that allows the borrowers to pay a fixed interest rate for the intial three years, gives borrowers plenty of time to repair their credit score and then refinance. At the same time, due to fixed interest rate borrowers can easily predict the monthly payments. But, when the three years period ends, the interest rate becomes super high. As it increases by an index as well as a margin which is called as fully indexed rate margin. Due to which, most borrowers cannot afford to pay their monthly payments any more.
- Another major disadvantage is the if a borrower is going through tough times, like if he is unemployed or any other financial problems, he cannot refinance any other loan option to get rates easily affordable by him.
- For those borrowers who consult payday lenders to take a second chance loan have other cons associated with them. One is their extraordinarily high interest rates. If you buy a two-week payday loan where the fees is $15 for each $100, then this will cost you you around 400 percent in the annual interest rate.
How Can I Apply For A Second Chance Auto Loan?
If we talk about the borrowing process for a second chance auto loan, then it is generally the same for all. No matter if your credit score is good or bad.
It is important that you check if you can apply for car financing loan through a credit union or a bank. Once, you have an idea about your eligibility criteria, then pay a visit to your dealer.
Now, from where should you begin?
You may begin with the the financial organization that you are already familiar with and extend from there. You can also comparing options from different available lenders and make efforts to achieve pre-qualified status for the loan. This way you can learn more about the terms of loans that you may avail.
However, it is important to rememebr that even if you pre qualify for a specific loan, it does not mean a confirmation of loan approval. Yes, it can guide you about your borrowing limits, interest rates as well as the monthly payments. All this information can help you analyze if a particular loan falls within your planned range or is simple unaffordable for you.
It is always better to make a back up plan for the worst case scenarios. Let’s say, some unfortunate incident happened and your lending financial isnitution does not pre qualify you for the loan. In such situation, you have to take necessary steps fto repair your credit score. Otherwise you cannot avail any loans in future.
Should I Apply For A Second Chance Loan?
Now, the real questions is that even if you know that you can easily clear all requirements necessary to qualify for a second chance loan, should you really apply for one? We have listed down few points, that will help you in making an informed and wise decision.
The first thing that you must check is that whether or not the loan is affordable for you. Compare it with you current income and expenses. Then decide if you will be able to repay the monthly payments without any difficulty.
Next, it is important to determine if the total time duration of your loan is equal to or more than the expected lifetime of the car. For example, a eight year loan on a six year old car that is not even going to last for even last 13 years is a big red light.
If you have a gut feeling that the deal being offered to you is unfair then do not opt for it. There are hundreds of lender out there who can work with you and offer you a deal that feels justified to you. So never go for an unfair deal.
It is important to determine the need of this loan for you at the moment. Will you survive without buying some more time? In certain situation, borrowers have an option to wait until their credit score repairs and gets better. But if you think that no other transportation can help you commute easily and you have urgent need to have your own tranport, then you may go fot it.
Yo-Yo Financing Scam
So, if your loans and car both are coming from the same place, then what other things should you look out for? How to save yourselves from Yo-Yo financing scams.
How It Works?
When you sign a contract with your dealer and go home in your own car.
After some days, you may get a phone call that your dealer was unable to avail the loan for you at the terms that were negotiated keeping the affordability criteria in mind.
What happens now? You may have to pay a higher interest rate.
Another alternate suggestion can be to either pay a bigger amount in down payment or maybe avail both options. In case you cannot afford any of them then this means bad news for you because now, you have to return your car.
Here also, you have some good and bad options for returning the car. But the option that most people opt for is to wait for the completion of your financing and till then leave your car. Just make sure that you keep everything in writing.
Experts suggest thoroughly reading the contracts. Why is it so essential to read them? Sometimes, your contract may include clauses like “financing that needs to be approved”Consumers who have a good credit score may come across dealer loan snags. But the chances can be higher for subprime borrowers,” who can end up being more vulnerable, she adds.
We hope that after reading this article you have gained enough information about the second loans, their types, advantages & disadvantages.
Just make sure that before you plan to buy a second chance loan, you double check that there is no way you can apply for traditional financing from a lender or a bank and get qualified!