To many, a second-chance car loan seems like a gift from heaven. After endless rejections, it is extremely relieving to finally get approved and drive home with a new car.
Second-chance car lenders are not disreputable. They merely shift the focus from the past to the present. Instead of focusing on the mistakes you’ve made, they care for what you can commit to right now. This approach has given hope to thousands of households – and put many of them behind the wheel again.
Still, second-chance car loans remain controversial. Some experts claim that their usefulness does not justify their high costs. Are they right?
Overview/Summary [If you don’t want to read the entire article]
A second-chance car loan is available to customers who aren’t able to secure finance with a regular lender. Second-chance lenders focus less on someone’s credit history and more on their current ability to repay. This way, they can step in where others would simply cop out.
To gauge whether they can extend credit to you, these companies will look at your current job and income situation and whether you have any financial reserves. They will also adjust the monthly rate to reflect how much you can pay.
As a result, your chances of a car loan improve and the danger of a default decrease.
Second-chance car loans make sense for those with a very poor to poor credit score or no credit score at all. You also stand to benefit from them if you have no income, a low income or no verifiable income. All of these will make it hard to get car finance with a bank or credit union.
The main benefit of a second-chance car loan is that it can get you behind the wheel again. The way these loans are set up, you should be able to pay them off in full. As a result, your credit score will gradually move North again.
If they become too expensive, however, they can put you at risk of a default. Make sure to check the following criteria before signing any contract:
- Is the loan affordable?
- Does the deal seem fair?
- You should also verify that the loan term doesn’t exceed the expected lifespan of the car.
If at all possible, try holding off on a second-chance car loan for as long as you can. Instead, save up some money so you can afford a meaningful down payment. This will make the loan cheaper and bring the loan term down.
All in all, a second-chance car loan is a great way to get a car loan even with a bad credit rating. If you can, you should, however, also try to improve your score. First steps towards this goal are using a credit building card, closing and consolidating superfluous accounts and reducing your debt.
Most of us would agree that everybody deserves a second chance. But what about car loans? Can you really expect to get auto finance with a low credit score? If you’ve been declared bankrupt? If you’re unemployed? Many banks would answer these questions with a firm “no”.
Some lenders, however, are more open to the idea of a bad credit car loan. They believe that if you’re really serious about paying off your obligations, you can find a solution that benefits both sides. And so, they will offer second-chance car loans to many of those who have been rejected in the past.
If you, too, have found it hard to secure finance, then a second-chance car loan does look very promising. But is it safe? And will you actually be able to afford it?
In this special, we delve deep into every detail of the debate. We explain when these loans are a good idea and when they’re not. What their benefits and disadvantages are. And, finally, how to choose the right car to go with your loan.
Table of Contents
- What’s the difference between a second-chance car loan and a regular one?
- From past to present
- From present to the future
- The key question: How much can you afford?
- Who needs a second-chance car loan?
- No credit
- No verifiable income
- Low income
- No income
- Can I apply for a Second Chance Car Loan?
- What are the benefits of a second chance car loan?
- What are the disadvantages of a second-chance car loan?
- What to look out for
- What do you really need?
- Can I do something about my bad credit?
First, however, let’s answer a truly fundamental question:
What’s the difference between a second-chance car loan and a regular one?
Just like in real life, there are no free meals or miracles in the world of finance. In fact, chances of shaking hands with an alien are probably higher than getting a gift from a bank.
So how do second-chance car loan providers do it? Why can they offer something that so many banks won’t even touch?
One key to solving this mystery relates to legal changes made after the past decade’s economic crises. Most experts at the time, probably correctly, identified the financial collapse as a crisis of the banking system. Lenders had become arrogant, greedy and careless. Their behaviour came at a high price and cost tax payers billions of Pounds worldwide.
To prevent anything like this from ever happening again, governments agreed to restrict the banks’ freedom in extending credit. Every application now had to fulfil certain standards. Sub prime lending, which had become a popular sport among many financial institutions, became all but impossible.
The measures were definitely successful in terms of stabilising markets and re-installing trust in the finance system. Ironically, however, they mainly hurt the financially weak. Before the changes, it was hard enough for anyone with bad credit to get finance. Now, it had essentially become impossible.
From past to present
But there’s more. The decisive difference between a regular car loan and its second-chance counterpart relates to the way a lender will look at your financial situation.
A bank, as a traditional finance company, will look at the past to assess your present financial risk.
So if, in the past, you’ve
- paid some of your bills too late,
- defaulted on a loan,
- applied for insolvency or
- had personal items repossessed,
they will conclude that chances of you defaulting on a future loan is considerable. As a result, they will most likely reject your application.
From present to the future
A second-chance car loan provider will take an entirely different point of view. To them, the past can never fully explain the present.
People change, so do their personal circumstances. So what if you’ve been bankrupt or on the dole in the past? What matters is whether or not you’ve made necessary changes and improved your situation.
To gauge your financial risk, they will therefore not so much look into the past, but focus on your current situation:
- Do you have a job?
- If so, how secure is that job?
- What’s your income?
- Do you have any financial reserves?
- How much debt do you have?
- Even though you may have had issues in the past, have you recently made your payments on time?
The key question: How much can you afford?
Two points mainly set second chance lenders apart from banks: First off, they are willing to accept a slightly higher risk than other financial institutions. They can do this mainly because many of the rules we mentioned before will frequently not apply to them. The freedom this provides allows them to support those struggling with credit.
Secondly, their strategy is based on a simple shift: Instead of making you a take-it-or-leave-it offer, they will instead look at what you can actually afford to pay each month.
This may be a very simple concept. But it is remarkably efficient. Regular car loans may be cheaper than second-chance car loans. Ironically, however, the risk of failure is higher, because your monthly loan payments are higher. In comparison, a bad credit car loan is more expensive and takes longer to pay off. But it is still safer, because it keeps monthly payments to a minimum.
Even if you should suddenly loose your job or face unexpected problems, you should still be able to meet your obligations.
Who needs a second-chance car loan?
As we indicated, bad credit is the main reason for using second-chance car loans. The lower your score, the less interested banks will be to give you credit. Once your rating drops below a critical mark, it will be effectively impossible to get any kind of ‘regular’ finance. Second-chance lenders can help you bridge that gap and find a solution where traditional institutions can no longer help.
What is this critical mark? Generally speaking, a low credit score comes in two tiers: The first is ‘just’ poor credit. Typically, the main UK credit agencies define this as a score anywhere within the following bands:
- Equifax: 280-379
- Experian: 561-720
- TransUnion: Rating 2 / 551-565
Then, there is a ‘very poor’ rating, which has the following bands (taken from our article on very poor credit car finance):
- Equifax 0 – 279
- Experian 0 – 560
- TransUnion: Rating 1 / 0-550
The difference between ‘poor’ and ‘very poor’ can sometimes amount to just a few points. But it makes a world of difference. A poor score is by no means an exclusion criteria. A very poor one, on the other hand, will make it very hard to get any kind of deal.
But second-chance loans are not just for those with bad credit. Below are some more groups who will benefit from them.
What’s worse than bad credit? No credit! This situation occurs when you are still young and haven’t made any major purchases yet.
You’d assume a blank slate is a great thing. But, in reality, it is actually the exact opposite. Many students find this out the hard way when applying for their first car loan at university,
The thing is that you need to see things from the lender’s perspective. If your credit score is low, at least they know what they’re getting into. In fact, this is exactly what a second-chance lender does: She knows that your risk of a default is relatively high. However, she is willing to accept his in return for a higher interest rate.
But if you don’t have any score at all, there is no way of assessing that risk. You could be a perfect candidate and always pay your monthly obligations in time. Or you could cease making payments after a few months, leading to a default and repossession.
To avoid the latter, many banks will insist on a guarantor, which will usually be a parent, to back up the loan should things go wrong.
No verifiable income
Seeing is believing. Which is why many lenders will demand a proof of verifiable, W-2 income before granting you a car loan. This makes sense, if you think about it. Everyone can claim they earn ten thousand Pounds a month, after all. Not many do.
In general, saying you do not have a verifiable income simply means you do not have any income at all. Every employer is legally obligated to provide you with proof of income. So unless you’re working on the black market, this shouldn’t be an issue.
Sometimes, however, self-employed workers will face serious issues getting credit, as some banks simply won’t treat their income as secure enough. Usually, their tax return works. And yet, many of them are still not able to get an auto loan.
For them, a second chance car loan is a great way to get behind the wheel again.
Having no income whatsoever is a pretty bad place to be in. But having a low income can be almost as bad.
A low income can be the result of having a badly paid employment or only working part-time. Both can lead to the same financing problems, however. To banks, a low to very low income is usually a no-go, since their monthly rates are usually high and require a decent cash flow.
Second-chance lenders can not work miracles. But they may still be able to help.
In general, whether or not a low income is a deal breaker depends on how secure your job is. Second chance lenders especially will often be willing to work around the problem by significantly reducing the monthly payments. But it really helps if you can argue that your contract will not be terminated overnight.
Can things get any worse? Unfortunately, they can. Imagine you’re unemployed and have no income at all. Can you still get car finance? Or is that just a dream?
Again, it depends. If you are unemployed, don’t have any financial reserves, no prospect of a new job and a bad credit score, we have to be honest: It’s unlikely you’ll find a lender willing to provide you with a loan.
However, things are different if you still have some money in the bank. This is not as unlikely as it may seem. We’ve heard of cases where the applicant did not have any income but reserves of 100,000 Pounds. Obviously, this will leave an impression on lenders.
In other cases, being able to get a car can be a precondition for getting a new job. This is something you should definitely mention during the negotiations.
Finally, hardly anyone ever truly has no income. Even if you’re on benefits, you receive a small, but not entirely meaningless sustenance. Unlikely as it may seem, some lenders will be willing and able to give you credit based on this benefit payment.
Can I apply for a Second Chance Car Loan?
When it comes to applying for a standard bank loan, there are very clear criteria who can apply:
- You need to be an adult.
- You will usually need to have at least a ‘poor’ credit score.
- Also, you need to have some form of income that the lender deems sufficient.
- A bankruptcy in the past or a criminal record are very often instant exclusion criteria.
- Very often, you need to make a down payment.
Second-chance car loans, on the other hand, are far more flexible. Lenders will have different rules, depending on their priorities and preferences. They will also request different documentation and focus on different aspects of your finances.
That said, we can’t think of anything that would lead to automatic rejection. Anyone can apply for a second-chance car loan and every one’s application will be seriously considered. If the lender is professional, they will also make sure that your application will not harm your credit score in any way.
So, if you can’t get regular car finance, don’t hesitate to try a second-chance car loan. That’s what they’re there for!
What are the benefits of a second chance car loan?
Obviously, the biggest benefit of a second chance car loan is that it will probably be the only car loan for many people.
In itself, that’s already quite an achievement. Thanks to innovative dealers and new financial companies, thousands of potential customers are finally able to drive a car of their own again.
But there’s another quite important benefit. If you can not get any loan whatsoever, it is doubly hard to improve your credit rating. The entire rating system is based on your ability to pay off debt (or to avoid it in the first place). If you can not get any credit, you’re in the same spot as someone without a credit score: Banks can not gauge the risk of lending to you. Your rating will remain low and you’ll find it exceedingly hard to make any progress.
A second-chance car loan could change all that. This type of loan gives you a serious chance to get back on your feet again. If you can keep up your monthly payments, first results should show up after roughly a year. If all goes well, your score will improve and you’ll regain some of your financial strength and freedom.
What are the disadvantages of a second-chance car loan?
On the other hand, a second-chance car loan has its downsides, too.
For one, it is more expensive than most regular car loans. This is because
a) these loans will have a higher interest rate to reflect the higher risk of the transaction.
b) tend to have longer loan terms, which, by default, lead to higher overall costs.
You also need to find a company that seems reasonable. If you’re working with a lender who is merely out to make quick cash, you could find that even the slightest failure to comply could lead to serious problems.
If push comes to shove, the question is whether the second chance lender will show understanding – or instantly repossess the vehicle.
What to look out for
In a helpful article, Creditkarma gives four criteria:
- Is the loan affordable: Obviously, people with a better credit score will be able to get better offers. And just as obviously, experts will always advise you against accepting second-chance car loans, because they can be expensive. But this is all beside the point. The real question is whether you can manage to pay your monthly contributions. The way dealers can influence this is by extending the lease of the loan and reducing the monthly rate. As long as you can afford the monthly payments, you’re okay.
- Does the deal seem fair? It is one thing to pay a little more. It is something entirely different to pay predatory rates. This is one reason we strongly recommend against working with payday lenders, for example. There is no fixed rule on what is fair, as this is naturally in the eye of the beholder. But one way of getting a feeling for a good offer is to compare different dealers to get a feeling for the middle ground.
- Lifespan of the car: A loan term should never last longer than the expected lifespan of the car. Otherwise you’d be paying off a vehicle that can no longer be driven. Information on a car’s life expectancy can be found online.
- Can you do without buying for a little longer? If you’re short on cash at the moment, do consider whether you can hold off on buying. Not only will this allow you to rebuild your credit. It also means you can save up for a down payment, which will bring the costs of the loan down even more.
How to choose the right car
One thing you can do to make the most out of a second-chance car deal is to be extremely selective with the car you buy. The model you choose has a huge impact on the financial implications of the deal and can literally decide whether you improve your credit score or spiral further down.
This may seem like a trivial statement. Curiously, however, it’s usually the last thing people think of.
Which is why it makes sense to carefully consider the following points.
What do you really need?
If you’re in need of a second-chance car loan, you will usually be in a tight spot, financially. So this really isn’t the time to think about your dream car or to ponder what you would look like in a cabriolet. It also isn’t the best of moments to find out you really needed a bigger trunk after signing the paperwork.
So, before you even set foot in a dealership, make sure to make a list of all the things you need out of a car. Consider who will be driving it, how often you’ll be driving it, and, importantly, how much you can spend on things like fuel or repairs. Generally speaking, a smaller, more reliable vehicle will be more suited to your needs than a large, luxurious vehicle which is impossibly expensive to repair in case of a problem.
This should be a no-brainer, but we’ll include it anyway: Look for second hand vehicles only.
Costs are obviously one reason. But, truthfully, we can say that there is hardly any real reason to opt for a new car anymore. These days, used vehicles have improved so much in terms of quality and reliability, that they are hard to distinguish from a new one. They tend to be great to drive and will often be hardly any worse when it comes to their fuel efficiency.
Safety is probably the only department where technology has made any real advances over the past few years. Admittedly, this is an important area. But even a five year old car is still pretty safe.
The real challenge is to hit the sweet spot age-wise. Buy a three year old car and costs may still be too high. Buy a twenty year old one and you may find the repair costs exceed the savings you’ve made.
Around the 7-8 year mark is where you can usually get the best deals. Try to focus on these before you step into the showroom.
Car body type
One great and easy way to save money is to check for different body type variations of the same model.
Just like paint colours and certain accessories, body types go through phases of increasing and waning popularity. For a while, saloons and hatchbacks were by far the most coveted car style. Today, SUVs have all but wiped out the competition and made some body types like saloons and mini vans all but superfluous. Soon, that, too could change again.
A hatchback and a saloon of the same model tend to be pretty much comparable when it comes to their quality. So unless you have an urgent need for a certain car body type, do have a look if you can save some valuable cash by opting for a cheaper one.
As you will undoubtedly know, cars go through constant phases of updates and changes. Each model generation has its own benefits, quirks and charms. Each has its downsides, too.
You can significantly improve your deal by keeping this in mind.
After all, you can save a lot of money by opting for a cheaper generation. Take the re-designed Mini Cooper, for example. The third and most current generation is obviously both most reliable and most expensive. The second generation, on the other hand, is considered by many as the golden generation and therefore commands high prices. Which means that if you can detect potential issues while looking, you can get the best deals with a first generation used Mini Cooper. The same goes for the Ford Focus – each generation has its fans and detractors and will command vastly different prices.
What’s more, you can make sure to keep future repair costs down by selecting only a model from a safe generation. Sometimes, brands will update their cars within the same generation and significantly improve them. Using online tools, you can get the best possible deal in this regard.
Can I do something about my bad credit?
Even if you’re opting for a second chance car deal, improving your credit score can be a good idea. Although some second chance lenders hardly take it into consideration, it will signify that you’re serious about becoming a more reliable customer. It can also potentially get you a better, i.e. cheaper deal.
Here are some first steps for improving your score:
- Use a credit building card: As we mentioned, the best way to improve your rating is, ironically, to buy things and to pay them off in time. The only knack is that you may not be able to get a credit card if you’re in a bad spot financially. Credit building cards can be a great solution to that dilemma. They’re a lot easier to get access to and don’t carry the same risk of overspending as regular credit- or debit cards. By using such a card wisely, you can make real progress.
- Consolidate your accounts: If you have a bad credit rating, the last thing you need is confusion. This is why we strongly recommend closing all unnecessary accounts and consolidating everything into a maximum of two accounts. The added benefit is that this can contribute towards improving your rating as well.
- Reduce debt: probably too obvious as to require a mention. But we thought we’d add it to the list as it’s the most powerful statement you can make. Don’t be ashamed to pay off small amounts only. Every little bit counts and everything adds up over time.
Is a second-chance car loan the same as getting finance from a buy here pay here dealer?
In many ways, yes.
Strictly speaking, the two are not identical. There are financial institutions which don’t operate a car lot but will still offer comparable loans. Also, some payday lenders think of themselves as second-chance lenders.
In practise, you will want to focus mainly on dealerships. The simple reason is that it makes sense to combine the finance- and the car-buying-part of the process. Payday lenders, for example, will be happy to lend to you, but their business model is simply not suited for expensive items such as cars.
Buy here pay here dealers have a bad reputation. But that is by no means fair. They are a lot better today than they used to be. And they can offer highly competitive rates which put many banks to shame.
Are second-chance car loans safe?
Generally speaking, yes. Certainly, thanks to a consumer protection laws, they are no longer a grey area. Serious offences are usually discovered quickly. And the industry has done a lot to improve not just its image, but its products as well.
In many respects, it is up to you to make the deal a good one. Second-chance car loans make it easier to access finance. This is great in principle. In practise, it also means there’s a certain risk that you could get a loan you can’t actually afford.
So make absolutely sure that your income and reserves are enough to get you through the entire loan repayment period. Also, try to save up a little before you apply for the loan. If at all possible, make a down payment. These steps all help to make the loan more secure.
And if a deal is too expensive, don’t be afraid to refuse it.
How expensive is too expensive?
This is obviously a relative/subjective term. If you want to know how to define too expensive, you should ideally crunch some numbers
First, work out how much you can spend each month. Calculate your income after tax and deduct all of your fixed expenses. Then, add up the costs of the loan. Don’t forget that you will also need to include some wiggle room for possible repairs, gas, car taxes and the likes.
Finally, compare the two numbers: Are your incomings sufficient to cover the outgoings? The two numbers should never be identical. You will need some leeway for unexpected financial shocks in the future.
How does the application procedure work?
At Concept Car Credit, we don’t think of second-chance car loans as an act of mercy. We think of it as a rational offer. Most of our customers are perfectly capable of buying a car. They just need the right conditions and terms.
Everything starts with a phone call at 0800 093 3385 or a message through our application form. After we’ve gone through a few simple questions to assess your financial strength, we then either accept your offer or recommend holding off a little bit longer.
If approved, you can select a suitable car from our wide range of contemporary vehicles. They’re all tested and repaired and will feel as good as new!
Things move fast with us. You could be driving home with a new car the very same day!