Second-Chance Auto Loans: What You Need to Know

When your credit score isn’t where you’d like it to be, getting approved for a traditional auto loan may seem challenging — and financing is generally at the top of a car-buying checklist. That’s where second-chance auto loans come in. These loans are designed specifically for people with less-than-perfect credit, offering a pathway to car ownership.

Let's review the basics of a second-chance auto loan so you know where you could get one and things you should consider before applying.

What is a second-chance auto loan?

A second-chance auto loan is a car loan for people with less-than-perfect credit.¹ Where traditional auto loans may require a stronger credit score, second-chance lenders focus on borrowers who might otherwise be turned away, giving borrowers the opportunity to access reliable transportation.

Where to get a second-chance auto loan

There are a few types of lenders offering second-chance auto loans, including:

Online lenders

Online lenders are often a convenient option for securing a second-chance auto loan. Many online platforms allow you to compare different loan offers, making it easier to find one that works for you.

Remember to check with multiple lenders for prequalified offers before applying for a loan. While submitting a completed application could impact your credit score, checking for prequalified offers lets you see what loan amount you might qualify for, pending further details that come with the full application.

Some lenders specialize in working with borrowers who have a lower credit score, so they may be more flexible in their approval process.²

However, it’s important to research the lender before applying. Look for customer reviews, ratings and any available information to make sure the lender is credible.

Dealerships

Some car dealerships offer second-chance auto loans directly through their financing departments. This might be convenient because you could apply for a loan and purchase a car at the same time. However, it's important to keep in mind that interest rates on these loans are often higher than those available from a bank or other traditional lender. That’s because they’re typically backed by third-party subprime lenders, and dealerships may charge more to offset the risk of lending to buyers with limited or less-than-perfect credit histories.

Also, watch out for car-buying scams, especially at shady or short-term dealerships. One common trick is the “yo-yo scam.” This happens when you sign loan papers thinking the deal is done, but later the dealership says the loan didn’t go through and gives you new terms that cost more.³

To avoid this, check the dealership’s reputation before buying. You can look them up on the Better Business Bureau (BBB) website to see if they have a good rating.

Traditional banks and credit unions

Although banks and credit unions generally have stricter requirements for loans, some may still offer second-chance auto loans.

Some second-chance auto loans at a bank or credit union may come with lower interest rates compared to other options,⁴ but you’ll need to meet the eligibility criteria. If you’re already a member of a credit union or have an existing relationship with a bank, it may be worth asking about second-chance loan options.

Points to consider before getting a second-chance auto loan

If a second-chance auto loan seems like the right move for you, there are a few points you should consider, including:

Monthly payments

Whether you're applying for a traditional auto loan or a second-chance auto loan, consider whether you can afford the monthly payments. Take a close look at your budget and determine how much you could realistically pay each month. Don’t forget to factor in the total cost of the loan over time, including interest and any additional fees, the cost of insurance, gas, and maintaining the car - and maybe even parking expenses, too. Make sure the payments fit comfortably into your lifestyle without putting too much stress on your finances.

How it could affect your credit history

Like any credit product, a second-chance auto loan can impact your credit history — positively or negatively — depending on how you manage it.⁵ Making on-time payments can help improve your credit score by showing lenders that you’re responsible with debt.

On the other hand, missing payments or defaulting on the loan can hurt your credit score and make it harder to qualify for credit in the future. It's important to treat a second-chance auto loan with the same level of care as any other loan to build or maintain a healthy credit history.

Interest rate

It's important to consider the interest rate since it may be a bit higher when it comes to second-chance auto loans. Because lenders may see you as a higher risk, they could charge more to compensate for the potential of not getting paid back in full. When considering a second-chance loan, shop around to find the best possible interest rate and consider how it will impact the total cost of the loan over time.

The risk of repossession

A second-chance auto loan is considered a secured loan, which is a loan backed by something valuable you own called collateral. In this case, the car is used as collateral for the loan.

Some lenders may require a GPS device to be installed on the financed vehicle. This device allows the lender to track the vehicle’s location in case of missed payments or default. While it gives the lender security, it also means that if you fall behind on payments, the lender could repossess the car to cover the amount you owe.

Pros and cons of a second-chance auto loan

When considering any loan, it's important to think through the pros and cons — and second-chance auto loans are no different.

Pros

• More accessible for those with less-than-perfect credit.
• Opportunity to rebuild credit through consistent, on-time payments.
• Could be a steppingstone to improving financial stability.
• Might be the only option for financing.

Cons

• Higher interest rates may be associated with second-chance auto loans.
• Potential for fees and costs that might not be charged by traditional lenders.
• Risk of repossession if the borrower fails to pay.

Alternatives to second-chance auto loans

Save and buy with cash

If you're able to wait, saving up to buy a car with cash could help you avoid interest and fees altogether. This approach requires patience but may be a financially smart move in the long run. Plus, you won’t have to worry about a credit check or repossession, and you’ll own the car outright.

Improve your credit score

Working to improve your credit score before applying for a loan may open the door to better terms. Pay down debts, make timely payments and check your credit report for errors like a missed payment that wasn't actually missed. Over time, these steps could increase your creditworthiness.

Add a cosigner

If you’re struggling to secure a second-chance auto loan on your own, consider adding a cosigner with a stronger credit history. A cosigner may help increase your chances of approval and even help you qualify for better loan terms.

However, keep in mind that both you and your cosigner are responsible for the loan, so it’s important to communicate and make sure your payments are on time to protect both parties.

Decide if a second-chance auto loan is right for you

A second-chance auto loan could be a helpful solution if you need it, but it’s essential to weigh the pros and cons carefully. Consider your financial situation, future goals and whether you can handle the loan responsibly.

With thoughtful planning, a second-chance auto loan may help you get on track financially and give you the assurance of reliable transportation.

Sources/Disclosures

1,2 https://www.bankrate.com/loans/auto-loans/second-chance-auto-loans/
3 https://www.bankrate.com/loans/auto-loans/yo-yo-auto-loan-scams/
4 https://www.bankrate.com/loans/auto-loans/second-chance-auto-loans/#where
5 https://www.investopedia.com/terms/s/secondchanceloans.asp