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What Is a Second Chance Car Loan?

What Is a Second Chance Car Loan?
Jason Steele
Jason SteeleUpdated November 15, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A second chance car loan, also called a subprime auto loan, is a type of car loan designed for people with fair, poor, or bad credit scores. It’s also a way for people to get auto loans after bankruptcy, repossessions, and other experiences that may have had negative consequences on their credit.Every lender has a different definition of subprime credit, so your approval for second chance loans will vary. The Consumer Financial Protection Bureau and FICO® define a subprime credit score as 619 and below.Most people of working age in the United States need a way to get around and a car is the answer, but for many, a typical car loan is just not possible. The most common reason why people get denied an auto loan is because of their credit scores. Statistically speaking, young people might have the most trouble getting approved, as people aged 18-23 have an average credit score of about 674 and often haven’t held jobs for long periods of time. Those with bankruptcies or repossessions on their credit history may also find difficulty getting auto loans.While a second chance auto loan is generally not as good as one you’d get with a good credit score, it may be what you need to get back in the driver’s seat.

How Do Second Chance Car Loans Work?

Second chance car loans are nothing too complicated to understand. The bottom line is a subprime auto loan works much like a traditional auto loan. You’ll apply to a lender to borrow a certain amount of money for a particular car. The lender then evaluates your level of risk based on credit history, credit score, income, and more. Every lender weighs these factors differently. Once approved, the lender will let you know the terms of the loan. You don’t have to commit to the offer until you sign it. 

Pros of Second Chance Car Loans

Best and only option: Besides waiting to build your credit, second chance car loans might be your best and only option to finance a car if traditional auto loans are unavailable.Chance to rebuild credit score: Banks and credit unions usually report on-time payments to credit bureaus, whereas buy here, pay here dealers usually do not.

Cons of Second Chance Car Loans

Higher Rates

Second chance car loans typically means higher interest rates and extra fees. Lenders may also ask you to pay a larger down payment than it would be for a traditional auto loan.

No Chance to Rebuild Credit Score

Not all second chance lenders report to credit bureaus, which means you wouldn’t be able to use it as an opportunity to improve your credit. Additionally, some dealers only report late payments and not on-time payments.

Special Conditions

The borrower may have to agree to special conditions before finalizing the second chance auto loan, such as having starter interrupts installed, which can be used to remotely disable the car if timely payments aren’t made.

Requirements for a Second Chance Auto Loan

Unlike traditional auto loans, you don’t need a very good credit score to be eligible for second chance car loans. In fact, some lenders (typically credit unions) will base your approval on your financial ability to make payments, rather than your credit score.It’s advisable to check with your lender to see what you’ll need to bring to apply. You’ll likely need two valid forms of identification, proof of income documentation, and your social security number. You will also need information on the specific car, such as make, model, year, and VIN number. The better prepared you are to provide such documentation, the quicker they’ll be to send an offer.

Refinancing an Auto Loan vs Second Chance Auto Loan

Refinancing a car loan with bad credit is not the same as getting a car loan in the first place if you have bad credit. Essentially, the auto loan refinance process helps people find a cheaper and faster way to pay off their existing loan. The goal of the second chance auto loan is finding any loan when you’re stuck with subprime credit scores. 

When Is It a Good Idea to Get a Second Chance Auto Loan?

If you really need a vehicle to get to a job, a second chance auto loan might be your best and only option. With that said, you now have the task of deciding whether it’s worth it. Here’s what you should consider:


You’ll need to know if you can afford paying the down payment and loans on time, given your current income and expenses. Think realistically about other costs that come with the car, such as auto insurance premiums, registration, and repairs. 

Length of the Loan

The length of the loan matters arguably more for second chance loans, as the cars purchased are typically older with more mileage. You’ll want to consider whether the length of repayments will outlive the life of the car. The length of the loan may also impact the amount of interest you’ll pay. 

Quality of the Loan

You should consider whether the deal is fair. Don’t take one dealer’s word for it. There are many lenders out there, so pause before you rush to complete a deal. Before you even visit a dealership, see what deals are available from banks and credit unions.If you don’t need a car immediately, try building your credit score over a few months to become eligible for better auto loans. Holding a job, practicing responsible credit card use, and being an authorized user on a responsible friend or family’s account all look very attractive to lenders. Even a month of good practices can make a difference.

When Is It a Good Idea to Refinance an Auto Loan?

Improved Credit Scores

You’ll want to have an improved credit score from when you got your loan. Most lenders won’t refinance your loan until you have at least fair credit (580-669). There’s a bigger upside if all of your payments from the auto loan are reported to the credit bureaus.

No Fees and Prepayment Penalties

You should familiarize yourself with your current loan deal’s fees and prepayment penalties, if applicable. If you have prepayment penalties on your existing loan, it may lose you more money to refinance your vehicle.

The Takeaway

Second chance car loans can help you finance a car, even if you don’t have a good credit score. The catch is that second chance auto loan usually provides loans at less ideal rates. To help you seek the best loans, look for lenders with competitive rates who will report on-time payments to the credit bureaus and don’t penalize for early payments, as these can be great options for refinancing you second chance car loan down the road.If you want to save money by refinancing your car loan, Lantern by SoFi has free resources that can help.

Frequently Asked Questions

How can you get a second chance auto loan?
What are the requirements for a second chance auto loan?
What are the pros and cons of a second chance auto loan?
Photo credit: iStock/sankai

About the Author

Jason Steele

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.
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