Second-Chance Car Loans: What They Are and Where to Find Them
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Second-chance car loans are geared toward buyers with poor credit or no credit who may have bankruptcies, repossessions or other major credit issues. Second-chance car financing might seem like your only option if you match the criteria, but you need to watch out for potential predatory lending practices, including sky-high interest rates and extra fees.
What is a second-chance car loan?
With second-chance financing, factors outside of credit may be considered, including income, expenses and employment history. If you have poor credit — FICO considers a score of 300 to 579 as very poor — little or no down payment or if you want to buy a high-mileage vehicle, your auto loan may be denied by traditional lenders, but a second-chance lender could offer more flexibility.
Unlike traditional loans, your payments on second-chance auto loans — also referred to as subprime car loans — may not be reported to the credit bureaus. That means that in addition to the high risk of borrowing, your payments may not boost your credit score. You may also have to agree to special requirements, such as having a starter interrupt device installed that could have GPS tracking and would disable the vehicle if you fall behind on payments.
Where to find a second-chance car loan
There are many lenders who offer second-chance car loans, including banks such as Capital One and Ally Bank that work with people who have low credit scores. A local credit union may also be able to provide a subprime auto loan or another financing solution.
National subprime auto lenders
These lenders work with dealers nationwide, often specializing in bad-credit auto financing. You may get an offer from one of these lenders if you apply for financing through a dealership:
- Regional Acceptance: An affiliate of BB&T, Regional Acceptance reports paid-off auto loans to the credit bureau and provides free, interactive courses to help consumers make informed personal finance choices.
- Santander Consumer USA: Santander Consumer USA is one of the largest subprime auto lenders in the country, though it’s track record isn’t spotless. The Georgia attorney general reached a $550 million settlement with the company in May 2020 over the company providing subprime auto loans to consumers with a high probability of default. If you want to apply directly, you could go through RoadLoans, its online, direct lending division.
Another subprime auto lender option could be Credit Acceptance.
If you’re not able to secure financing through a lender, you may be able to find a dealer to approve you for a second-chance car loan. As we’ve noted, you can find car dealerships that work with repossessions, bankruptcies or other negatives in your credit history.
Some dealerships advertise “buy-here, pay-here” financing, specifically targeted to buyers with bad credit. One of these second-chance car lots may be the only place you can get a loan. Plus, they can offer the convenience of buying a car and arranging financing in one place.
But the convenience can come at a cost, so the key to finding your best deal is to shop around. In-house lending can deter the comparison shopping you could do with a loan preapproval from a third-party lender.
A buy-here, pay-here dealership may also charge the highest interest rates allowable in your state. It may also include payment stipulations that leave you at a greater risk of repossession. Federal Trade Commission Attorney Katie Worthman advises to watch out for the following:
- Extra fees and services hidden in your loan contract, including warranties and additional products
- Pressure to sign blank or incorrect contracts and forms
- Pressure to buy a more expensive car than you can afford
- Loan applications and purchase contracts that aren’t written in your native language
How to get a car loan with bad credit
Here are some steps you can take to find the best financing available with bad credit, which doesn’t have to stop you from taking out a car loan.
Pull your credit report
Pulling your credit report doesn’t hurt your credit score. Rather, it gives you the opportunity to find and fix errors, and identify negative or harmful information.
Visit AnnualCreditReport.com to access free copies of your reports from the three main credit bureaus — Equifax, Experian and TransUnion. You can do this for free weekly through April 2021 (previously, you could get a free copy once every 12 months from each bureau).
Before visiting a dealership, compare several lenders to see which ones will work with you. A local credit union may offer better interest rates than a dealer. Online lenders may offer competitive rates since they have fewer overhead costs. You may even find special options or discounts through the institution where you already do your banking.
Loan preapproval gives you a quote on your loan terms, including the APR — interest rate plus fees — and total amount you’re eligible to borrow. Having preapproval for your loan amount can help you determine the price range of your purchase.
For preapproval, some lenders may conduct a hard inquiry into your credit, which can cost you a few points on your score. You can also reduce the impact on your score by submitting applications within a 14-day rate-shopping period, which should allow the various inquiries to only be counted once. To avoid multiple drops to your credit score, look for lenders that perform soft pulls.
Consider a cosigner
If you can’t qualify on your own, a spouse, family member or friend may be able to help. An auto loan cosigner can increase your chances of qualifying for a loan by agreeing to take responsibility if you miss the loan payments.
Becoming a cosigner is a serious commitment with risks that should be carefully considered. Just like the primary borrower, the cosigner could suffer credit damage, be sued or have their wages garnished if loan payments fall behind. Even though a cosigner takes on this risk, they don’t have any right to ownership of the vehicle.
Build your credit score beforehand
If you can, consider taking time to work on your credit before applying for a loan. You can always repair bad credit over time if you take the right steps. Here are a few ways to build or improve your credit while preparing to take out an auto loan:
- Become an authorized user. Have a trusted family member or spouse add you as an authorized user to their credit card account. When you’re added to the account, the payment information will appear on your credit report as if it belongs to you.
- Take out a secured credit card. Even with bad credit, you can make a cash deposit and get a secured credit card. Use the secured card to start building a positive payment history on your credit report.
- Talk to a credit counselor. A certified credit counselor can review your credit reports with you to help you address errors and create a personalized plan for improving your scores.
Is a second-chance car loan right for me?
Just because your options are limited doesn’t mean you have to accept a predatory loan, pressure from a dealer or unaffordable terms. With a little bit of work, you can still find a variety of auto loans for bad credit. Here are some questions to ask before signing a contract for your next loan.
Can I afford the full cost of the purchase?
Even if the market price of your vehicle is affordable, you could unwittingly end up with a car that’s too expensive. Worthman warns that dealerships often include a markup for arranging financing, which could add as much as 2 percentage points to your interest rate.
Before closing the deal, make sure you understand the full cost of the loan repayment and that you’re prepared to take on all the costs associated with car ownership. Many owners only consider how much they can afford to pay each month but neglect to factor in one-time expenses like state taxes and title fees, and ongoing expenses, such as gas, insurance, registration and upkeep.
Am I getting the best deal available?
Remember you’re shopping for two separate products: a car and a loan. For the vehicle, make sure you’ve compared listing prices from several outlets, including online car-buying sites, to find the lowest available price. For the loan, make sure to compare lender offers. Buyers should negotiate interest rates, even if their credit scores are low.
Do I understand what’s in my contract?
Look through your contract for hidden products or services. Make sure to ask questions. If there’s a language barrier, ask for the contract in your native language. If you’re uncomfortable, you can always walk away.