Going about our day-to-day activities without a set of wheels can be quite the hassle. What if you’re unable to buy a car due to poor credit, though?
Well, whether your poor credit score is a result of repossessions, bankruptcies, or any other major credit-related issue, second chance car financing is here for the rescue.
In this post, we cover everything you need to know about second hand car loans, from what they are to how you can acquire one without falling victim to predatory lending practices.
What Are Second Chance Car Loans?
Second chance car financing is basically loans that you apply for when you’re unable to get a loan from a traditional lender, like a bank or credit union. Even private lending businesses are viable to reject your loan application if you have a credit score that’s below average.
For clarity, a bad credit score is one that’s between 350 and 650, whereas a fair credit score is between 651 and 700. And according to FICO, a credit score that’s under 579 is considered very bad.
Unlike traditional lenders and top-tier loan providers, second chance lenders are more than willing to deal with clients that have lower credit scores.
Credit score isn’t the only factor these lenders consider when assessing loan applications. They also consider income, employment history, and expenses.
Difference Between Regular and Second Chance Loans
The difference between second chance loans and regular loans that are acquired from traditional lenders like banks and credit unions is quite vast, with many intricacies and details to be considered.
The first set of differences that are to be considered are legal differences. After the past decade’s financial collapse of the banking system, loan providers have become quite predatory and greedy, charging higher fees and interest rates.
To prevent irresponsible lending, most governments set intact acts that restrict the freedom of the banking system when it comes to providing credit. They did that by setting strict eligibility criteria, which, in turn, put an end to sub prime lending; for the most past, at least.
The measures taken by governments have been successful as far as establishing trust in the finance system and stabilizing the lending market. This, however, had (and still has) a negative impact on the financially weak, making it almost impossible to acquire a loan from a traditional lender if you have bad credit.
To help you understand the differences between regular loans and second chance loans, let us highlight two timelines from each lender’s perspective; the first timeline is the past up to the point at which the loan is acquired, and the second timeline is the point at which the loan is acquired up to the future.
From the Past Up to Getting the Loan
The way second chance loan providers look at your financial situation differs from the way traditional lenders do. Traditional finance entities look at your financial situation to assess financial risk, which is why they consider things like late bill payments, insolvency applications, loan defaults, and repossessions.
Second chance loan providers, on the other hand, aren’t too concerned with the past. They do consider it, but it doesn’t affect their decision-making too much. After all, people change, and they shouldn’t be defined by their past financial decisions.
So, how do second chance loan providers go about determining their applicants’ eligibility for a loan? Well, they focus mainly on your current situation.
From Getting the Loan Up to the Future
Instead of focusing on the past to assess your financial risk, second chance lenders focus mainly on the present by inquiring about your employment situation, how secure your job is, how much you’re making per month, whether or not you have financial reserves, and whether or not you have any debts.
Even if you’ve had major financial problems in the past, second chance lenders won’t bat an eye to them. They will take them into consideration, of course, but they won’t let them influence their decision-making.
Your credit score may be below average or even poor, but if you’re currently doing fine, financially speaking, meaning you’re employed, receiving income on a regular basis, and so forth, you’re highly likely to be accepted for a second chance loan.
Do Dealership Lots Offer Second Chance Financing?
A lot of car dealerships adopt a Buy Here Pay Here (BHPH) model, meaning they finance loans with their buyers internally without the interference of a third party. So, yes, we can say that a lot of dealerships offer second chance financing.
Why? Because selling cars is their means of making money, and they know that acquiring a loan from a traditional lender is a hassle that can deter a lot of potential customers from buying cars. So, they take it upon themselves to make car financing easier.
Doesn’t that put such dealerships at risk? It does. However, most of these dealership lots have become quite adept at pinpointing the right potential borrowers and employing the precautions required to offset the risk of lending.
Among the precautions that such dealerships employ include having an inventory of older vehicles in good condition, demanding biweekly payments, working out different budgets with clients, charging higher interest, offering longer loan terms, accepting trade-ins, and more.
It’s important to keep in mind that not all dealerships that adopt the BHPH model have a good reputation. Some are actually known to be quite predatory in the sense that they apply interest rates and processing fees that are too high.
That being said, if you wish to take the BHPH dealership route, it’s very important that you resort to a reliable loan matching service in order to work out a loan with a reputable BHPH dealership that isn’t going to take advantage of your low-credit situation.
Another thing you should keep in mind is that the cars you buy via a second chance car loan serve as collateral to offset the risk of lending. This means that if you miss payments, the car you purchased will be reclaimed by a repossession agent.
Advantages of Second Chance Car Loans
The most glaring advantage that second chance car loans have to offer is that they’re the only available car loans for people with poor credit. Thanks to second chance car loans, you no longer have to have an above-average credit score to drive your own car.
There’s another less obvious advantage to second chance car loans, though, which is the potential to improve your credit score.
It’s very hard to improve your credit score and get back on your feet if you’re unable to receive any loans. In fact, the whole credit rating system is based on borrowers’ ability to pay off their debts or avoid debt entirely.
In other words, if you’re unable to receive a loan (credit), it’s as if you don’t have a credit score, which makes it impossible for banks to gauge the financial risk of lending you money. This, in turn, will keep your poor credit score stagnant, making it hard for you to improve it.
Luckily, second chance car loans can help you overcome your poor credit situation. After all, it’s a loan just like any other loan, and like we already mentioned, the whole rating system is based on your ability to pay off debts. This basically means that if you’re able to pay your monthly repayments on time and all goes well, your credit score will improve and you’ll finally overcome your financial hurdle.
Disadvantages of Second Chance Car Loans
Just like with any type of loan, second chance car loans come with their own set of disadvantages that must be taken into consideration before applying.
The first disadvantage is that second chance car loans are more costly than regular car loans. How so? For starters, second chance loans have much higher interest rates than regular car loans, which is a means of offsetting the risk of lending. Further, second chance car loans have longer repayment terms, which adds to the overall costs of the loan significantly.
Another disadvantage is that not all second chance car lenders are reputable. In order to receive a second chance loan without falling victim to predatory lending practices, you must deal with a trusted, reputable lender.
Some lenders, mainly the ones who aren’t very reputable, are quick to make the repossession decision at the slightest failure to comply with the agreed-upon terms of the loan.
It’s within their contractual rights, of course, but it’s much better to deal with a reputable second chance lender who is understanding and willing to work around your situation.
Who Are Second Chance Car Loans For?
Second chance car loans are made primarily for people with poor credit scores. Please bear in mind that just because your score is less than average doesn’t mean that all traditional lenders won’t give you credit.
However, there’s a critical low point that, if reached, it’ll become virtually impossible to get any type of loan from a bank, credit union, or any other traditional lender. That critical point, according to FICO, is under 579 (very poor).
Another thing you should keep in mind is that there’s a world of difference between a ‘poor’ credit score and a ‘very poor’ credit score. People with poor credit scores are able to acquire loans from traditional lenders, whereas those with very poor credit aren’t.
People with very bad credit aside, there are other groups of people who are eligible for a second chance car loan. The following paragraphs help shed light on each group.
People with No Credit
Just like people with a poor credit score, those who have no credit have no chance of acquiring a loan from a traditional lender, and that’s where second chance car loans come in handy.
Wait a minute! Having no credit is a bad thing? It is. You may think of it as having a blank slate, but in the eyes of potential lenders, there’s no way of assessing your financial situation or gauging the risk of lending you money.
Whether you’re the perfect candidate for the loan or someone who always defaults, your chances of acquiring a loan from a traditional lender with no credit at all are very slim. And even if you get accepted for a loan, you’ll most likely have to provide a guarantor should anything go wrong.
With second hand car financing, you can acquire a loan with no credit. It won’t be easy and there will probably be quite a few security measures to offset the risk of lending, but it’s possible.
People With No Income
Second chance car loans can also be quite handy with those who are unemployed and aren’t receiving income on a regular basis. However, for this to happen, the borrower must have some sort of financial reserve.
If you’re unemployed with bad credit, no financial reserves and no job lined up anytime soon, your chances of acquiring a loan of any type are pretty much non-existent.
If you’re applying for a job and one of the preconditions of getting accepted is to have your own car, you have to mention this when applying for a car loan, as it can increase the chances of your loan getting accepted.
Second chance financing is also available for those who receive benefits. Granted, not all lenders are willing to work with borrowers on benefits, but there are quite a few who are willing to take the risk.
People with Low Income
Having a low-paying job, be it a full-time or part-time one, is another dreadful situation that may limit your chances of acquiring a loan from a traditional lender. Why? Because traditional lenders tend to have fairly high monthly rates that people with low income may not be able to keep up with.
Second chance lenders, on the other hand, are able to deal with borrowers with low income by reducing their monthly payments or increasing their repayment terms.
However, for second chance lenders to work with you, as someone with a low income, you must have a stable and secure job. Understandably, they don’t want to lend money to someone whose contract is on the verge of getting terminated.
People with No Verifiable Income
When applying for a loan from a traditional lender, you’ll be required to provide proof of verifiable income in order for your loan application to be processed. After all, one can claim to make thousands of dollars a month, when in reality, they’re barely making ends meet.
In the eyes of a traditional lender, having no verifiable income is like having no income at all, which makes sense considering employers are required to provide their employees with proof of income if need be.
If you’re self-employed, you may run into trouble trying to get a loan from a traditional lender since most lenders will view your income as non-secure. In this case, you can resort to your tax return, which isn’t always successful, or you can resort to second chance financing.
Second Chance Car Loan Eligibility Criteria
The criteria for second chance car loans are a lot more flexible than the ones set for standard bank loans. To get a standard bank loan, you need to be an adult, have a decent credit score, have some sort of stable income, no bankruptcies, and no criminal record. You may also need to make a down payment.
With second chance car financing, each lender will have their own set of rules and criteria, depending on their priorities. They may also require different types of paperwork to gauge your finances.
Having said that, it’s hard to pinpoint exactly the eligibility criteria that second chance financing companies have. The good news, however, is that we can’t think of anything that can trigger an automatic loan request rejection. In other words, anyone can apply for a second chance loan.
Second chance financing offers people with poor credit, no credit, low income, and, in some cases, no income, the chance to buy their very own set of wheels without having to bend over backward.
Granted, second chance loans are associated with higher overall costs than standard loans due to higher interest and charges, but at least your application will be considered and most likely accepted. Not to mention, second chance loans can help you improve your credit score.
It’s very important that you choose your lender carefully. You want to steer clear of non-reputable lenders who are just trying to make some quick cash. Rather, opt for a reputable, professional lender who will happily work around your financial situation.