A lower credit score can make it difficult to secure an auto loan with favorable terms. However, you might still qualify for financing through a second-chance auto loan, also known as a subprime auto loan. These loans are designed for borrowers with past credit issues, but they typically come with higher borrowing costs, leading to steeper monthly payments.

If other financing options have been exhausted and you urgently need a new vehicle, a second-chance auto loan could be a viable solution. Nonetheless, it’s important to weigh the benefits and drawbacks of these loans before applying so you know what to expect.

What are second-chance auto loans?

A second-chance auto loan, also known as a subprime car loan, is designed for drivers with poor credit who may not qualify for traditional auto loans. According to Experian, a FICO score between 501 and 600 is classified as subprime, while scores below 500 are categorized as “deep subprime.”

Eligibility for second-chance auto loans can vary widely among lenders. Some may require a minimum credit score and proof of income, while others might have less stringent credit requirements but impose stricter income criteria or offer fewer loan options.

You can expect higher interest rates with a second-chance auto loan. For instance, while individuals with excellent credit typically receive an average interest rate of 5.38 percent on new car loans, subprime borrowers average 12.85 percent, as reported by Experian. This increased rate reflects the higher risk of default associated with lower credit scores.

Where to get second-chance auto loans

Although not all lenders provide second-chance auto loans, you can still find them at certain financial institutions and dealerships.

Dealerships

Some dealerships offer second-chance loans, often found at “buy here, pay here” (BHPH) lots, which cater to individuals with poor or no credit. However, these should be considered a last resort due to their typically high interest rates and practices such as installing tracking devices or starter interrupters to facilitate repossession.

Be cautious of deals that seem too good to be true and thoroughly research any subprime lenders. Check customer reviews and verify their reputation to avoid scams like the yo-yo scam, which could waste your time and money.

Additionally, consider exploring no-haggle car sellers such as CarMax and Carvana. These companies may offer financing options even if you have less-than-perfect credit. For instance, Carvana might approve financing with an annual income of just $4,500, provided your credit profile is free of active bankruptcies.

Finance service companies

Many online companies provide second-chance auto loans, with qualification requirements and interest rates varying significantly between lenders.

Using an online lending marketplace, such as Autopay, can simplify the process of finding and comparing these lenders. Before applying, check if the service charges a fee for matching you with lenders.

You’ll start by filling out a brief online questionnaire, which will connect you with lenders within the marketplace’s network. You can view loan offers, including monthly payments and interest rates, without affecting your credit score.

What to consider before taking out a second-chance auto loan

While second-chance car loans are available, they come with potential drawbacks. Consider the following factors before applying to ensure you make an informed decision.

Can you afford the monthly payments?

Second-chance car loans pose a higher risk for lenders, which is why they come with higher interest rates, leading to more expensive payments. For instance, the average monthly payment for subprime new auto loans is $749, while borrowers with excellent credit pay an average of $723, according to Experian.

What are the fees?

Be sure to investigate all potential fees associated with the loan, including application, origination, prepayment, and any monthly account fees. Carefully review the lending agreement and ensure you understand all borrowing costs before signing any paperwork.

Will you build credit?

If you’re looking to improve your credit with your car loan, a second-chance auto loan may not be ideal. Some lenders may not report loan activity to credit bureaus, which means you miss out on the opportunity to build your credit by making timely payments. Always ask the lender if they report to the credit bureaus and check the fine print to confirm this information.

Are you getting the best rate available to you?

Second-chance auto loans typically have higher interest rates, with subprime borrowers averaging 12.85 percent and deep subprime borrowers averaging 15.62 percent, according to Experian. Shop around with multiple lenders to find the best rate possible. Even a slight reduction in the interest rate can lead to significant savings on your monthly payment and overall interest costs.

Will the lender be installing a starter interrupter or GPS tracker?

Be cautious of buy-here, pay-here dealerships that require the installation of starter interrupters or GPS trackers. These devices facilitate vehicle repossession for missed payments and leave you with little time to rectify the situation or negotiate with the lender.

Alternatives to second-chance auto loans

If you’ve been denied for a second-chance car loan or can’t secure a favorable rate, consider exploring these alternatives:

  • Add a co-signer. Having a co-signer with excellent credit and a stable income may increase your chances of approval. Keep in mind that if you miss payments, your co-signer will be responsible for the loan.
  • Check with local credit unions. Many credit unions offer car loans to individuals with lower credit scores. If you’re already a member, schedule a meeting with a loan officer to discuss your options. Your existing relationship with the credit union may help you qualify for financing.
  • Improve your credit. If you have time, working on improving your credit score can increase your chances of securing a loan with better terms in the future.
  • Buy with cash. Saving up to pay for the car in cash can help you avoid loan eligibility requirements and interest costs. While it may take time to accumulate the necessary funds, it can be a straightforward way to purchase a vehicle without the burden of financing.

In Conclusion

A second-chance car loan might be a viable option if you’re unable to secure financing elsewhere, but it may not always be the most financially prudent choice. Improving your credit score could help you qualify for better loan terms in the future.

As Travis Bowie, an auto lending expert from Jerry, advises, “For borrowers with subprime credit, it’s important to remember that second-chance loans are not your only option.”

Evaluate the loan terms carefully to determine if the benefits of a second-chance car loan outweigh the costs. If they don’t, explore alternative options that might offer better financial outcomes and reduce potential complications.