A second chance car loan, also called a subprime auto loan, is a type of car loan designed for people with fair, poor, or bad credit scores. It’s also a way for people to get auto loans after bankruptcy, repossessions, and other experiences that may have had negative consequences on their credit.
Every lender has a different definition of subprime credit, so your approval for second chance loans will vary. The Consumer Financial Protection Bureau defines a subprime credit score as 619 and below, while FICO® classifies it as below 670. Those with bankruptcies or repossessions on their credit history may also find difficulty getting auto loans.
While a second chance auto loan is generally not as good as one you’d get with a good credit score, it may be what you need to get back in the driver’s seat.
Key Points
• Second chance car loans help individuals with poor credit buy vehicles.
• These loans often have higher interest rates, fees, and down payments.
• Some lenders do not report payments to credit bureaus.
• Assess affordability, repayment period, and vehicle condition before applying for a second chance car loan.
• Carefully review all terms and conditions to avoid financial strain.
How Do Second Chance Car Loans Work?
Second chance car loans, also known as subprime auto loans, work much like a traditional auto loan.
You’ll apply to a lender to borrow a certain amount of money for a particular car. The lender then evaluates your level of risk based on credit history, credit score, income, and more.
Every lender weighs these factors differently. Once approved, the lender will let you know the terms of the loan. You don’t have to commit to the offer until you sign it.
Pros of Second Chance Car Loans
Besides waiting to build your credit, second chance car loans might be your best and only option to finance a car if traditional auto loans are unavailable.
These loans can also offer a chance to rebuild credit score: Banks and credit unions usually report on-time payments to credit bureaus, whereas “buy here, pay here” dealers usually do not.
Cons of Second Chance Car Loans
The main pro of a second chance car loan is the opportunity to finance a vehicle. There are cons to these loans, though, including:
Higher Rates
Second chance car loans typically means higher interest rates and extra fees. Lenders may also ask you to pay a larger down payment than it would be for a traditional auto loan.
No Chance to Rebuild Credit Score
Not all second chance lenders report to credit bureaus, which means you wouldn’t be able to use it as an opportunity to build your credit. Additionally, some dealers only report late payments and not on-time payments.
Special Conditions
The borrower may have to agree to special conditions before finalizing the second chance auto loan, such as having starter interrupts installed, which can be used to remotely disable the car if timely payments aren’t made.
Requirements for a Second Chance Auto Loan
Unlike traditional auto loans, you don’t need a very good credit score to be eligible for second chance car loans. In fact, some lenders (typically credit unions) will base your approval on your financial ability to make payments, rather than your credit score.
It’s advisable to check with your lender to see what you’ll need to bring to apply. You’ll likely need two valid forms of identification, proof of income documentation, and your Social Security number. You will also need information on the specific car, such as make, model, year, and VIN number. The better prepared you are to provide such documentation, the quicker they’ll be to send an offer.
Refinancing an Auto Loan vs Second Chance Auto Loan
Refinancing a car loan with bad credit is not the same as getting a car loan in the first place if you have bad credit. Essentially, the auto loan refinance process helps people find a way to pay off their existing loan with more favorable interest rates and/or terms. The goal of a second chance auto loan is finding any loan when you have subprime credit scores.
Recommended: Guide to Car Loan Interest Rates
When Is It a Good Idea to Get a Second Chance Auto Loan?
If you really need a vehicle to get to a job and have subprime credit, a second chance auto loan might be your best and only option. With that said, you now have the task of deciding whether it’s worth it. Here’s what you should consider:
Affordability
You’ll need to know if you can afford paying the down payment and loans on time, given your current income and expenses. Think realistically about other costs that come with the car, such as auto insurance premiums, registration, and repairs.
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Length of the Loan
The length of the loan matters arguably more for second chance loans, as the cars purchased are typically older with more mileage. You’ll want to consider whether the length of repayments will outlive the life of the car. The length of the loan may also impact the amount of interest you’ll pay.
Quality of the Loan
You should consider whether the deal is fair. Don’t take one dealer’s word for it. There are many lenders out there, so pause before you rush to complete a deal. Before you even visit a dealership, see what deals are available from banks, credit unions, and online lenders.
If you don’t need a car immediately, try building your credit score over at least a few months to become eligible for a better auto loan. Holding a job, practicing responsible credit card use, and being an authorized user on a responsible friend or family’s account all look very attractive to lenders. Even a month of good practices can make a difference.
Recommended: Understanding Auto Loan Settlements
When Is It a Good Idea to Refinance an Auto Loan?
It’s a good idea to refinance an auto loan once you’ve built your credit score and you won’t have to pay any prepayment penalties.
You’ve Built Your Credit Score
You’ll want to have a higher credit score from when you got your loan. Most lenders won’t refinance your loan until you have at least fair credit (580-669). There’s a bigger upside if all of your payments from the auto loan are reported to the credit bureaus.
No Fees and Prepayment Penalties
You should familiarize yourself with your current loan’s fees and prepayment penalties, if applicable. If you have prepayment penalties on your existing loan, it may not be worth it to refinance your auto loan.
Recommended: What Are Small Car Loans?
The Takeaway
Second chance car loans can help you finance a car, even if you don’t have a good credit score. The catch is that second chance auto loans usually provide loans at higher interest rates. To help you seek the best loans, look for lenders with competitive rates who will report on-time payments to the credit bureaus and don’t penalize for early payments, as these can be great options for refinancing your second chance car loan down the road.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
How can you get a second chance auto loan?
You can apply for a second chance auto loan online or in person, through banks, credit unions, dealerships, and other lenders. The process is nearly identical to that of a traditional auto loan. Just make sure you have all of the necessary documentation and information prepared. Finally, you’ll want to compare rates and loan terms to competitors.
What are the requirements for a second chance car loan?
You don’t need a very high credit score to qualify for a second chance auto loan, but requirements vary by lender. In terms of the application process, you’ll likely need forms of identification, proof of income, and proof of residence. You can bring in pay stubs and other appropriate documentation directed by the lender to verify the information on your application.
What are the pros and cons of a second chance auto loan?
The pro of a second chance auto loan is that it provides those with poor credit a legitimate loan option that may help them have access to a vehicle and build credit. The cons are that second chance car loans typically have high interest rates, fees, and they may hike up your down payment, plus some do not report positive information to credit bureaus.
Photo credit: iStock/Mariia Vitkovska
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