A low credit score can make it difficult to approve a competitive car loan rate, but it could be eligible for funding through a second chance car loan. Also known as subprime auto loans, these are compatible with borrowers in the subprime and deep subprime categories. Tradeoffs are high borrowing costs, resulting in higher monthly payments.
If you run out of other options, a second chance car loan will help you raise money. Still, it is worth considering the advantages and disadvantages of these loans before applying to know what you should expect.
What is a Second Chance car loan?
A second chance car loan or subprime car loan is a bad credit auto loan offered to a driver who may be denied funding a traditional car loan. Generally, a FICO score between 501 and 600 is considered a subprime. Anything lower is considered a deep subprime.
Second Chance car loan eligibility guidelines vary widely from lender to lender. In most cases, you will need a minimum credit score and a minimum income. People without strict requirements may still consider your credit score and income, but these lenders may also consider other factors, but with any option you can expect higher interest rates and less favorable loan terms.
You’ll almost certainly need to pay higher interest rates on your second chance car loan. A good credit score earns an average interest rate of 5.18% on new car loans, while subprime borrowers face a much higher average interest rate of 13.22%, based on Experian data. This is because lenders consider you to be at high risk of default.
Where to get a second chance car loan
Not all lenders offer these types of loans, but there are a few places where you can find them.
dealer
Some dealer financing may include second chance loans. Generally, buy this and pay a lot for customers who don’t have a credit score or low credit score (BHPH). Due to potentially high interest rates, they should only be used as a last resort. Additionally, some dealers can place entangled tracking devices or starters in their vehicles, which can be an invasive drawback for some drivers.
Also, if you need a second chance car loan, it’s worth exploring Hugle online car dealers like Carmax and Carvana. Funding doesn’t require great credit. These options allow you to shop and fund used cars in one place.
Online lender
There are multiple lenders that operate completely or partially online, like Lightstream, which offers unsecured car loans. You can also consider using the online lending market to find and compare these lenders.
Before filling out the market form, check if there is a service charge to match your lender. If not, you may be able to quickly compare options that suit your credit score and budget. You can also view loan offers that include monthly payments and interest rates without affecting your credit score.
Banks and Credit Unions
While major banks often deal with borrowers with good credit from good credit, there are local banks and credit unions willing to work with poor credit borrowers. These are worth exploring if you already have an account or are willing to open it.
In particular, you may be able to get a car loan from a credit union, as you typically have a lower fee. If you are already a member of the credit union, make an appointment to speak to a lender. You are eligible for funding based on your existing relationship.
What to consider before you get a second chance car loan?
While accessible, second-chance car loans are not without flaws. Please keep these factors in mind before applying to make an informed decision.
Can I afford to buy monthly payments?
Second Chance car loans are risky for lenders. As a result, they charge sudden interest rates that could make your payments more expensive. The average monthly payment for Subprime New Auto Loans is $762, but according to Experian, borrowers with a good credit score pay just $727.
The more steep monthly payments could be linked to higher car loan interest rates offered by subprime borrowers. The average interest rate for applicants with subprime or deep subprime credits ranges from 13.22% for new cars to up to 21.58% for used cars.
You also need to focus on fees like application, submission, advance payment, monthly account fees, and more to get ideas for additional costs that you need to work on your budget. I will refrain from signing the documents until I read the loan agreement and understand all the costs involved. You can also use an auto loan calculator to determine exactly how much a loan costs each month.
Do you want to build credits?
If you plan to buy a car as your first step to improving your credit, a second chance car loan may not be a good idea. Some lenders choose not to report loan activity to the credit department. This means losing the opportunity to build credit through on-time payments.
Ask your lender if you want to report it to the credit department. There are many things. A positive payment history is important if you want to get better terms or refinance your car loan in the future. It is also worth reading the fine print to see the exact credit report that the lender makes when paying off the loan.
What is the interest rate?
Subprime borrowers have a high average interest rate, which is one of the most important aspects to consider when comparing second chance car loans. Shop with multiple lenders and apply for pre-approval is essential to finding the best deal. If you can find a single percentage point lower rate, you can get more affordable monthly payments and save on interest.
For example, monthly payments on a $26,000 car loan for a 60-month term vary dramatically depending on interest rates. The total amount you pay in interest will also be affected, and you will end up spending thousands, if not thousands, of dollars over the life of your loan.
| April | Monthly payment | Total interest paid |
|---|---|---|
| 9% | $540 | $6,383 |
| 14% | $605 | $10,298 |
| 19% | $674 | $14,467 |
| twenty two% | $718 | $17,086 |
Will lenders install additional devices?
Avoid buying money, paylots that require starter equilibrium or GPS trackers to approve funding. These types of devices make the vehicle easier to reclaim due to non-payment, leaving little or no time left to bring in the current for a loan or work with the lender to arrange payments.
Does the deal look too good?
Beware of transactions that appear untrue when investigating subprime lenders. Before applying, check customer reviews and thoroughly consider potential lenders. Otherwise, you could end up being victimized by yo-yo scams and other car buying scams, losing money, time, and the car you were trying to buy.
Second Chance Auto Loan Alternatives
If you are turned down for a second chance car loan or are not qualifying for a decent fee, consider other options. That might mean waiting a few months, but quite a bit is worth the patience.
- Add a cosine. Lenders may approve applications if they have co-signers with excellent credit and stable income, but keep in mind that many lenders only accept co-applicants, not co-signers.
- Improve your credits. If you have time to wait, improving your credit will allow you to qualify for the loan with more favorable terms. On average, borrowers close to prime credit (FICO scores 601-660) have an interest rate of 3-5% lower than interest rates with subprime credits.
- I’ll buy it with cash. It takes time to save enough money to cover purchase prices, vehicle registrations and other related expenses. Still, you can avoid lender eligibility guidelines and interest payments associated with financing your car loan.
Conclusion
Second Chance car loans may be an option if you are not approved for funding elsewhere. Still, it may not be a wise financial move. In the future, it may be better to wait for your credit health to improve and buy it to qualify for more favorable conditions.
If you need to take out a second chance car loan, compare lenders and review available terms before determining whether the benefits outweigh the costs.
