Second-Chance Car Loans: What They Are and Where to Find Them

Second-chance car loans allow buyers with bad credit to finance a car. With a second-chance loan, lenders look at more than just your credit score — they also consider your income and ability to pay off your debt.

While a second-chance car loan can be a lifeline for buyers with bad credit, these loans often come at a steep cost. Shopping around for a loan and negotiating its terms is crucial to keeping your costs in check.

What is a second-chance car loan?

Getting a car loan may seem almost impossible when you have bad credit, which is generally classified as a FICO score lower than 580. If you struggle to qualify for a traditional auto loan, a second-chance lender could offer more flexibility.

A second-chance auto loan may be a good option for people with a checkered credit history, but buyers should be aware that this kind of financing can be risky. These loans have higher interest rates and may require you to offer a larger down payment. Unlike traditional loans, your payments on second-chance auto loans, sometimes called 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.

Where can you find a second-chance car loan?

A low credit score doesn’t have to keep you from financing a car. Check with your local bank or credit union to see if they offer auto loans for borrowers with bad credit. Other lending options include:

National subprime auto lenders

• RoadLoans.com: As the online, direct-lending division of Santander Consumer USA, RoadLoans.com provides car loans to buyers with a range of credit scores. Car buyers can apply online and potentially receive an immediate answer.
• Capital One: You can prequalify for an auto loan online using Auto Navigator by Capital One. Prequalification does not require a hard credit check and lasts for 30 days. However, buyers must purchase their vehicle from a dealership in the Capital One network.
• No-haggle dealerships: People with bad credit may be able to finance a vehicle with some no-haggle dealerships. Carvana will provide financing to most buyers, as long as they are at least 18 years old, have no active bankruptcies and earn at least $4,000 a year. Similarly, CarMax claims that they can “accommodate most credit profiles.”

Second-chance dealerships

If you can’t get a car loan from a lender, you may be able to finance your car through a second-chance dealer. Known as “buy-here, pay-here” lots, these dealers typically serve car buyers with bad or no credit. If you can prove that you have enough money to make your monthly payment, you can usually get a loan through one of these dealers.

When traditional lenders have turned you down, a buy-here, pay-here lot may seem like your only choice. We generally advise that you avoid these types of dealers. Buy-here, pay-here dealers charge sky-high interest rates and higher prices for their cars, may require a tracking device to be installed on your car and often engage in predatory lending practices.

How to get a car loan with bad credit

Bad credit doesn’t have to keep you from getting an auto loan. You can take steps to find the best financing available for your credit history.

Examine your credit report for errors

If you need a car loan, your first step should be to check your credit report. Lenders make financing decisions based upon your credit history. If your report has errors, it can hinder your ability to borrow money, or you might be stuck with a higher APR. Examine your credit report for errors and report any that you find, as they can drag down your score and may prevent you from getting the financing you need.

Improve your credit

If you can afford to delay your car purchase, spending time rebuilding your credit can improve your chances of securing a car loan. You may secure a lower interest rate or better repayment terms if you have a better credit score. Paying bills on time and paying down your debt may help boost your credit score. Avoid opening new credit accounts, as the hard-check inquiry can knock down your rating.

Consider a cosigner

Using a cosigner gives a borrower with bad credit a better chance of qualifying for a traditional auto loan with more favorable terms. If you can’t repay your loan, the cosigner agrees to take responsibility for your debt. Having a friend or family guarantee your loan repayment may make a lender more willing to extend credit at favorable terms. If you fall behind or can’t make your payments, you can damage your cosigner’s credit and possibly your relationship with them.

Get preapproved

Auto 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. Getting preapproved can help you determine the price range of your purchase. Not only does a preapproval take the stress out of financing your new or used car purchase, but it can also serve as a negotiating tool with the dealer.

For preapproval, lenders may conduct a hard inquiry into your credit, which can cost you a few points on your score. You can reduce the impact on your score by submitting multiple applications within a 14-day rate-shopping period, which should allow the various inquiries to only be counted once. By filling out a form with LendingTree, you may be able to receive up to five auto loan offers.

Compare lenders

Once you have multiple auto loan offers in hand, review the terms offered in each. The terms and interest rates of the loan can vary significantly from lender to lender. If you can get different preapproval offers, you can compare loan amounts, offered APRs and loan terms to find the best financing available.

Financing through a dealer can be more expensive than a bank, credit union or online lender, but dealers are sometimes willing to match preapproved offers. Once you’ve settled on a car, ask the dealer to match or beat your preapproval, and if they can’t, you can drive your new car with the peace of mind that you got a good deal on your loan.

Downsides to a second-chance car loan

A second-chance loan may seem like your only option when your credit is bad, but it is essential to understand the risks involved before you sign on the dotted line.

• Higher interest rates: Second-chance loans have higher interest rates. Lenders base their interest rates on your ability to repay your loan. A low credit score may indicate to a lender that you are less likely to repay your debt. By charging higher interest rates, lenders offset the risk they accept by lending to consumers with a poor credit history.
• Bigger down payment: When the lender views you as a risky borrower, you may be asked to pay as much as 10% of the car’s price upfront.
• Extra fees: Lenders may charge higher fees on a second-chance car loan. To circumvent state limits on interest rates, some lenders may increase the price of the car and the fees they charge to compensate for the cap.
• Potentially deceptive lending practices: Subprime auto lenders sometimes extend loans to customers who have a high probability of defaulting on their loan, violating laws that prohibit unfair or deceptive business practices. Santander Consumer USA, for example, reached a $550 million settlement in Georgia for exposing consumers to unnecessary risk. Remember that your ability to qualify for a second-chance loan does not necessarily mean that you can afford the loan. Before finalizing the loan, be sure you can afford to make the payments.

Is a second-chance car loan right for you?

Whether a second-chance car loan is right for you depends upon many factors, such as the car’s age, how much money you make and whether you can afford the monthly payments. When considering a second-chance auto loan, ask yourself the following questions:

Is the loan affordable?

Make sure that you are in a financial position to afford the monthly payments outlined in your contract. Defaulting on payments will ultimately cost more money, negatively impact your credit and leave you without a vehicle.

Am I getting the best deal available?

Not every lender uses the same scale to measure your credit score. What may be considered “bad credit” to one lender may qualify as an average score with another. The distinction can impact the APR you’re offered, which will impact the overall deal. Shop around for a car loan to ensure you’re getting the best deal available.

Do I understand what’s in my contract?

You should carefully read the contract before you sign. Make sure you understand the critical details of your auto loan, such as the loan term, interest rate, monthly payment and any additional fees you will be charged.

Can I wait to buy a car for a little longer?

If you aren’t in a hurry to buy a car, it may be better to focus on rebuilding your credit. With an improved credit score, you may be able to land an auto loan with better terms.