If you want to buy a car but are having trouble getting approved, second-chance auto loans may be able to help.
While they work like regular auto loans, they come with more lenient eligibility requirements. For example, traditional lenders will often turn down applicants with poor credit scores or concerning marks on their credit reports, but second-chance lenders may still approve them. However, with that second chance often comes less appealing terms, such as higher interest rates, larger down payment requirements and shorter loan terms.
Read on to learn more about the pros and cons of second-chance auto loans and when one can make sense.
Who offers second-chance auto loans?
Second-chance auto loans can be harder to find than traditional auto loans but here are a few places you can look:
- Online auto loan marketplaces: Some online auto loan marketplaces have partnerships with lenders that offer auto loans to individuals with subprime credit scores (FICO scores below 620). After applying, they’ll check to see if you pre-qualify with anyone in their network.
- Buy-here-pay-here dealerships: Certain dealerships provide in-house financing, meaning they handle the loans directly and set their own borrower criteria.
- Credit unions: Credit unions often have more lenient lending requirements, which can help members with poor or no credit to get approved.
- Local banks with special programs: Certain community banks may offer auto loan options designed to help borrowers rebuild their credit.
- Traditional dealerships: Many dealers work with a pool of auto loan lenders, some of which cater to borrowers with bad credit. They might be able to find a lender to approve you.
Finding a second-chance auto lender often requires some work, but it can be worth it if it helps you get the vehicle you need.
Pros and cons of second chance auto loans
Second-chance auto loans can be a stepping stone to buying a vehicle and getting your credit back on track, but they do come with a few drawbacks. Here are the main pros and cons to consider.
Pros:
- Access to a vehicle: Gain the ability to purchase a vehicle when you otherwise can’t.
- Flexible requirements: Get approved due to more flexible eligibility requirements, such as lower credit score and income requirements.
- Potential for refinancing: After making consistent payments over several months, you may qualify to refinance into a new auto loan with better terms.
- Build credit: If the lender reports to the credit bureaus, the loan can help you build a positive line of credit.
Cons:
- Higher costs: Lending to higher-risk borrowers typically means the costs of borrowing will be higher. You’ll likely face higher interest rates, shorter terms and higher monthly payments.
- Larger down payments: Some lenders require more money upfront to reduce their risk.
- No credit reporting: Some lenders may not report loans or payments to the credit bureaus. In those cases, they won’t help to build your credit scores.
- Stricter repossession terms: Some lenders have more aggressive policies for missed payments, such as placing a tracker in your vehicle so they can easily repossess it.
Should you get a second chance auto loan?
Second-chance auto loans are worth considering if you need to buy a vehicle and can’t get approved for a traditional auto loan. They provide a way for people with troubled or limited credit to get into a car, which may be necessary for getting to work and handling other responsibilities. However, the rates and terms aren’t typically the best so it’s important to fully understand them before committing. Review the interest rate, fees, monthly payment amount and total cost along with your budget.
To prevent a default, you’ll want to make sure you can afford the payments comfortably — even on a bad month. Before making the decision, consider all your possible solutions. If a second-chance auto loan ends up being the best fit, you can move forward with it and consider refinancing once your credit improves.
You might want to get a second-chance auto loan if:
- You absolutely need a vehicle for work, family obligations, or other essential activities.
- You have no other financing options available.
- You can comfortably afford the monthly payments.
- You have a stable income and financial situation.
- You're committed to making every payment on time.
- You have a plan to refinance after rebuilding your credit.
You may want to skip a second-chance auto loan if:
- You can temporarily use public transportation, carpooling or ridesharing.
- Your income is unstable or you're living paycheck-to-paycheck.
- The monthly payment would strain your budget.
- You're already carrying significant debt.
- You can save for 3-6 months to make a larger down payment on a less expensive car.
- A friend or family member might co-sign a conventional loan.
Alternatives to consider
If you’re having trouble getting approved for an auto loan, a second-chance loan isn’t your only option. You can also consider alternatives, such as:
- Applying with a cosigner: A cosigner is a person who agrees to pay for your loan if you can’t. If you know someone with good credit who is willing to take on that responsibility, they may be able to help you qualify.
- Improving your credit: If your need for a vehicle isn’t urgent, you may want to spend some time improving your credit so you can qualify for better rates and terms down the road. For example, paying down credit card balances, waiting for negative marks to drop off and paying all your bills on time.
- Save for a larger down payment: A larger down payment reduces the balance you need to finance which reduces the risk for the lender. If you can wait, you may want to spend some time saving up to improve your loan options.
Improving your financial situation
At the end of the day, you likely want to make decisions that will improve your overall financial situation. Whether a second-hand auto loan will do that or not depends on a few factors.
In most cases, it’s better to work on improving your credit and saving for a down payment so you can qualify for a lower-cost loan. However, if putting off getting a car is going to negatively impact you, such as preventing you from earning an income, the cost of the second-chance auto loan may be worth it. You’ll have to weigh the costs and benefits of your situation.
If you decide to go ahead with pursuing a second-chance auto loan, be sure to shop around and get quotes from a few lenders. Doing so will help to improve your chance of getting a competitive deal. Additionally, keep your eye on your credit after getting the loan while considering refinancing. You can always check if you pre-qualify without hurting your credit score and make the switch once it makes sense.
