A lower credit score can make it challenging to get approved for an auto with competitive terms. However, you could still be eligible for financing with a second-chance auto loan. Also referred to as subprime auto loans, these cater to borrowers with past credit challenges. The trade-off is higher borrowing costs, which results in a higher monthly payment.
If you’ve exhausted other options, this type of loan could be an option if you desperately need a new ride. Still, it’s worth considering the benefits and drawbacks of these loans before applying so you’ll know what to expect.
What are second-chance auto loans?
A second-chance auto loan, or subprime car loan, is a car loan offered to drivers with bad credit who can’t get approved for traditional auto loans. FICO scores between 501 and 600 are considered subprime, according to Experian; anything lower is called “deep subprime.”
The eligibility guidelines for second-chance auto loans vary greatly among lenders. Some lenders require a minimum credit score and may have an income requirement. Others may not have a minimum credit requirement but have an income requirement and limited loan options.
You will almost certainly have to pay a higher interest rate with a second-chance auto loan. As an example, an excellent credit score nets an average interest rate of 5.18 percent, whereas subprime borrowers average 11.53 percent, according to Experian. This is because lenders are assessing you as a higher risk of default.
Where to get second-chance auto loans
While not all lenders offer these types of loans, there are a few places where you can find one.
Some dealerships may be willing to offer a second-chance loan. In general, “buy here, pay here” (BHPH) lots cater to customers with no credit or low credit scores.
They should only be used as a last resort, though, since the interest rates on their loans are usually sky-high. And they often place tracking devices or starter interrupters on vehicles to make repossession easier.
Be wary of any deals that seem too good to be true when researching subprime lenders. Also, check customer reviews and thoroughly vet any potential lenders before you apply. Otherwise, you could fall victim to a yo-yo scam or other car-buying scam and end up losing money, time and the car you’re trying to buy.
It’s also worth exploring no-haggle car sellers like Carmax and Carvana. Good credit is not a requirement to get approved for financing. In fact, you could be eligible for financing with the latter with an annual income of just $4,500 if your credit profile is free of active bankruptcies.
There are finance companies that offer second-chance auto loans. Both qualification requirements and available interest rates will vary widely from lender to lender.
Consider using an online lending marketplace, such as Autopay, to make finding and comparing these lenders easier. Before applying, check whether your chosen service charges a fee to match you with lenders.
You’ll complete a brief online questionnaire to get matched with lenders in marketplace’s network that can potentially offer you a loan. You can also view loan offers that include monthly payments and interest rates without impacting your credit score.
What to consider before taking out a second-chance auto loan
Although they are accessible, second-chance car loans are not without flaws. Keep these factors in mind before applying to make an informed decision.
Can you afford the monthly payments?
Second-chance car loans are riskier for lenders. Consequently, they charge steep interest rates that could make your payments more costly. In fact, the average monthly payment for subprime auto loans is $761, but borrowers with excellent credit scores pay just $693, according to Experian.
Use Bankrate’s auto loan calculator to determine how much car you can afford.
What are the fees?
It’s important to investigate all fees, including application, origination, prepayment and any monthly account fees. Do not sign the paperwork until you read the lending agreement and understand the borrowing costs.
Will you build credit?
If you are planning to buy a car as a first step to improving your credit, a second-chance auto loan may not be the way to go. Some lenders choose not to report loan activity to the credit bureaus. So, you forfeit the opportunity to build your credit by making timely payments each month and eventually paying the loan off.
Ask the lender if they report to the credit bureaus if you’re considering a second-chance auto loan. It’s also worth reading the fine print to confirm as this information will typically be disclosed there.
Are you getting the best rate available to you?
Remember, subprime borrowers get an average rate of 11.53, according to Experian. It’s even higher for deep subprime borrowers – their average rate is 14.08 percent.
That said, it’s important to shop around with multiple lenders before settling for a second-chance auto loan. If you can find a rate even a single percentage point lower, you can get a more affordable monthly payment and save a bundle in interest.
Will the lender be installing a starter interrupter or GPS tracker?
Avoid buy-here, pay-here lots who require these devices as a condition to get approved for financing. Both make it easier for vehicles to be repossessed for non-payment and leave the borrower with little or no time to bring the loan current or work with the lender to make payment arrangements.
Alternatives to second-chance auto loans
If you’ve been turned down for a second-chance car loan or can’t qualify for a decent rate, consider other options.
- Add a co-signer. If you have a co-signer with excellent credit and a stable income, the lender may approve your application. However, if you fall behind on the monthly loan payments, they become your co-signer’s responsibility.
- Check your local credit union. Many credit unions offer car loans to those with low credit scores. If you’re already a member of a credit union, make an appointment to speak with a loan officer. You may be eligible for financing based on your existing relationship with the credit union.
- Improve your credit. If you have time to wait, improving your credit may help you qualify for a loan with more favorable terms.
- Buy with cash. It takes time to save enough money to cover the purchase price, vehicle registration and other related costs. Still, you can steer clear of the lender’s eligibility guidelines and interest payments that come with auto loan financing.
The bottom line
A second-chance car loan could be an option if you can’t get approved for financing elsewhere. Still, they may not be a smart financial move. You could be better off improving your credit health to qualify for more favorable terms in the future.
Be sure to review the loan terms before applying to decide if the benefits of taking out a second-chance car loan outweigh the costs. If not, consider alternatives that could save you a ton of money and headaches.