Second chance car loans are bad credit loans designed to help you purchase a new vehicle. These loans typically come with high interest rates and fees, and can end up costing you a significant amount of money in the long run. This is why it’s important to compare providers and find the best rates for your unique financial situation.
Learn more about how second chance car loans work and where you can apply.
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How do second chance car loans work?
Second chance car loans are designed to let borrowers with bad credit or no credit get access to new vehicle financing. Second chance lenders turn a blind eye to the state of your credit report, which is great for borrowers who don’t have the strongest track record. That said, they’ll charge you high fees and rates to compensate for the risk they have to take on.
This risk is associated with the fact that you’re seen as more likely to default on your payments due to your low credit score. As long as you make your payments on time, a second chance car loan can be a good way to improve your credit score and start building up a foundation of assets. These assets can then be used to help secure future loans which will further improve your credit as long as you make good financial decisions.
What’s considered a bad credit score?
A credit score is a summary of your credit history expressed as a number ranging from 300 to 900. Bad credit scores typically fall below 600, which is the range where you might have more difficulty securing a car loan. Good credit scores usually range from 600 to 900.
How can I get a second chance car loan?
You may be able to get a second chance car loan from your bank or credit union. It’s also possible in some cases to apply through an online lender. Usually, a second chance car loan will be as easy to qualify for as a bad credit loan. It will also come with steeper rates so you should be prepared to spend a little bit more than the average borrower.
A good starting point to find the best second chance auto loan for you is to apply with several different lenders. This will let you compare quotes to find the best rates on offer for your particular situation. It will also make sure that you get a sense of which lenders are willing to work with you, as well as which ones might be trying to take advantage of your bad credit.
How to get a competitive interest rate on a second chance car loan
You’ll want to look for a rate that falls below 11% and is spread out over the shortest term you can afford. It also makes sense to look for a loan that doesn’t have penalties for prepayment so you can pay your balance off early if you happen to have spare cash floating around.
You’ll also want to make sure to ask your lender if its rates are precomputed or simple. Precomputed rates are pre calculated for every year of your loan. This means you’ll pay 7 years of interest on a 7-year loan, even if you pay your loan off early. Simple interest rates are a better choice because they only apply to your outstanding balance.
Benefits of second chance car loans
There are a couple of benefits to second chance car loans that might make them a worthwhile choice as a last resort.
Give you access to financing. Second chance car loans can be used as a last resort if you can’t qualify for lower rates but still need a vehicle.
Bad credit doesn’t matter. A low credit score won’t affect your ability to qualify for this type of financing.
Easy to qualify. You’ll usually be able to qualify fairly easily as long as you’re willing to accept a higher interest rate to help mitigate your lender’s risk.
Lets you purchase a vehicle. You’ll be able to afford a vehicle that might be out of your price range otherwise.
Helps build credit. This type of loan can help you build up your credit as long as you make your car payments on time every month.
What to watch out for with second chance car loans
There are several significant drawbacks to consider before you sign up for a second chance car loan:
Expensive fees. You may need to pay exorbitant fees to get your second chance car loan in place.
High interest rates. You’ll usually pay much higher interest rates for a bad credit or second chance car loan than you would with a traditional lender.
Large down payment. You may have to pay a larger down payment to make up for your low credit score (or secure the loan with your vehicle as collateral).
Inflated purchase price. The price of your vehicle might be higher than expected because the dealer understands that you’re in a desperate situation.
Strict contract. Your repayment contract could be much more rigid with a second chance car loan, which could cause trouble if you miss any of your payments.
Second chance car loans scams
Second chance car loans can give predatory lenders a good foothold in the car sales industry. You should avoid working with any lender that:
Asks you to purchase mandatory loan insurance. You’ll want to avoid lenders that demand that you purchase loan insurance before releasing your funds.
Guarantees approval. You should look for another lender if the one you’re interested in guarantees approval without closely examining your personal and financial situation.
Doesn’t clearly outline your rates. You should be suspicious of any lender that attempts to hide your interest rates or other pertinent loan information in the fine print of your contract.
Provides financing “subject to approval”. You’ll want to avoid lenders that let you drive off the lot with a promised interest rate, only to call a few weeks later indicating that you’ll need to pay a higher interest rate to keep the car.
Things to consider before you sign on to a second chance car loan
Here are some important things to consider when deciding if a second chance car loan is right for you.
Second chance car loans can be expensive
Second chance car loans are a decent option if you absolutely need a vehicle but can’t qualify for a traditional loan. These loans can be used as a way to rebuild your credit, but they also come with much higher fees and interest rates. For this reason, it’s really important that you only sign up for one if you’re 100% certain that you can afford to make your payments on time.
Make sure you can afford the full cost of car ownership
You should make sure that you factor the additional expenses of car ownership into your budget before you take out a second chance car loan. These include emergency repairs, routine maintenance, gas, car insurance and roadside assistance. If you don’t think you can handle all of these extra costs in addition to your car payments, you may need to consider other options. Read more about the full cost of car ownership in our full guide here.
A second chance car loan can really impact your credit score
Be aware that the way you handle your second chance car loan can make or break your credit. If you don’t make your payments on time you risk badly damaging your credit score and potentially even losing your vehicle in the end. This is why you should read your loan agreement very carefully, and be sure that you’re equipped to shoulder the risk and responsibility of taking on a new loan before you accept the terms of your contract.
Second chance car loan alternatives
There are a number of alternatives that you can pursue if a second chance car loan doesn’t seem like the right fit for you:
Payday loan. If you want to buy a cheap second-hand vehicle, you might be able to take out a payday loan. These are usually for amounts between $500 and $1,500, and have to be paid back by your next paycheque. Just be aware that these loans come with very high interest rates and fees.
Short-term personal loans. You might be able to borrow money from your bank or a private lender if you’re a bit short on cash. If your credit score is low you can try applying for a bad credit loan that doesn’t come straight from a dealership.
Debt consolidation loans. If you’re looking to fix a more serious issue that you have with unmanageable debt, you may want to consider taking out a debt consolidation loan. This could allow you to pay off all of your debts with a lower rate loan, and then you’d only have to make a single payment each month.
How to apply for a second chance car loan
Second chance car loans typically have lenient eligibility requirements and a relatively straight forward application process.
Be a Canadian citizen or permanent resident
Be at least 18 years old, or the age of majority in your province or territory
Have proof of steady income and stable employment
Steps to apply:
Apply with a lender online or in person
Provide personal information such as your name, date of birth, address and email address (and prove your identity with some form of government-issued ID)
Give details about your employment status and income
Taking on a second chance car loan can be a good option if you aren’t able to qualify for a traditional loan. Just be aware that you’ll pay much higher interest rates and fees for this type of loan which means your vehicle will cost you more in the long run. Find out more about what a second chance car loan is and how you might be able to qualify for one.
Frequently asked questions about second chance car loans
You won't need to have a minimum credit score to apply for a second chance car loan in most cases. That said, you may have difficulty getting approved if you're in the midst of bankruptcy or you don't have any income coming in.
If you fail to make your vehicle payments, your credit score will suffer and you may even have to sell your vehicle to pay back your lender. That's why it's important to make sure that you make enough money to cover your payments every month.
You should expect to pay at least 15% to 30% interest on a second chance car loan. These rates may be precomputed or simple. You're much better off choosing simple interest rates since these will only charge you interest on your outstanding balance. Precomputed rates charge you a predefined amount of interest no matter how much money you pay off your loan.
You can apply for your credit score with one of Canada's two major credit bureaus: Equifax or TransUnion. You'll usually have to pay a fee to access your score immediately online. Otherwise, you can order a free copy of your credit score which will be sent to you in the mail.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, and an Associate’s Degree in Science from Camosun College. Much of Claire’s coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. In her spare time, Claire enjoys rock climbing, travelling and drinking inordinate amounts of coffee.
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