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A Second Chance at Car Ownership for Drivers With Bad Credit

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In a Nutshell

If you have a shaky credit history and aren’t able to get an auto loan from a prime lender, you may be able to get a second chance auto loan to buy a car. These auto loans are designed for people with bad or poor credit, and they usually have high interest rates and additional fees. This article will explain some of the pros and cons of second chance auto loans and what to consider before you get one to purchase a vehicle.

Written by Attorney Tori Bramble
Updated November 29, 2021

Not every lender is willing to finance people with negative credit histories. If you have a shaky credit history and aren’t able to get an auto loan from a prime lender, you may be able to get a second chance auto loan to buy a car. These auto loans are designed for people with bad or poor credit, and they usually have high interest rates and additional fees. 

This article will explain some of the pros and cons of second chance auto loans and what to consider before you get one to purchase a vehicle.

What Are Second Chance Auto Loans?

A second chance auto loan gives buyers with bad credit a second chance at getting a loan to buy a car. These loans — sometimes called subprime car loans — are designed for people who have damaged credit scores.

You may have a low credit score if your credit history includes negative events like a car repossession, a history of late or missed payments, or bankruptcy. While these events may have damaged your credit score, there are ways to get a fresh start so that you can get a car financed. But because your credit score has taken a hit, you’ll generally have a hard time getting a standard auto loan financed through a prime lender that finances people with higher credit scores. 

There’s no clear-cut definition of what a subprime borrower is, but if your credit score is between 450 and 650, you may fall into this category. If you’ve already been turned down for a standard auto loan, you may be eligible for a subprime car loan. While subprime loans have some downsides, they can help you purchase a car and raise your credit score over time if you make on-time payments to the lender.

Before you start applying for a subprime loan, it’s wise to get free copies of your credit reports and look at your credit history and credit score to understand your credit better. Also, look for mistakes in your credit report. If you find mistakes in your report, you can dispute them. This can help to raise your score. 

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The Ins and Outs of Second Chance Auto Loans 

When looking for second chance auto financing, it’s important to shop around with different lenders and compare the loan terms and fees. Also, before you visit a car dealer, try to get approved for a traditional car loan through a bank or credit union first. If you already have open accounts at a local bank, ask about their in-house financing options. Do this with several lenders and start comparing rates. 

You may even be able to get prequalified for a loan. This will give you a first look at what loan terms you’d have if you were approved for the loan. While prequalifying doesn’t mean you’ll be approved for a loan, it gives you a sense of how much you can borrow, what your interest rate will be, and what your car payments would be, if approved.

If a traditional dealership turns you down for a car loan because of your credit, look at alternative financing options. If second chance auto loans aren’t an option for you, find and visit “tote the note” car dealers. These dealerships offer in-house car financing and usually don’t run credit checks. But tote-the-note and other alternative financing options often require borrowers to make payments weekly instead of monthly. If this poses a hardship, it may not work in your situation.

Pros and Cons of Second Chance Auto Loans 

Like most loans, there are pros and cons to second chance auto loans. Here are the pros and cons of second chance auto loans.


If you need a car and don’t have any credit or have continuously been turned down by lenders a second chance car loan may be your best or only option. That’s because most car dealers and lenders won’t lend to people with bad credit. If the second chance auto dealer reports your payment history to the credit bureaus, this can help you rebuild and improve your credit score if you make your payments on time.


Not all second chance dealers report your payment history to the credit bureaus. If they don’t, it won’t help you build your credit history or improve your score, even if you make every payment on time. Having a low score and rocky credit history also tells lenders that you’re a risky borrower and may default on the loan. Because of this risk, second chance auto loan lenders usually require a higher down payment and charge high interest rates and additional fees. This can lead to high monthly payments. If you can’t make your payments, you risk having your car repossessed, which can lead to even more fees

Also, dealers that both finance and sell cars often raise the price of the car. To protect yourself from paying more than you should for a car, research car values on a site like Carfax so you’ll know what the vehicle is worth compared to what other dealers are charging for the same car. 

Precomputed Interest vs. Simple Interest

If you're approved for a second chance auto loan, it's important to find out if the loan has simple interest or precomputed interest. Knowing how the interest is calculated on your loan can save you money over the life of the loan. Be sure to look at your car loan contract to find out how your interest will be calculated.

With precomputed interest, your original payment schedule will be used to calculate interest. In this case, you won’t save on interest even if you make early or larger monthly payments or pay your loan off early. 

On the other hand, with simple interest, the interest is computed based on the balance of the loan when the payment comes due. So if you pay more than your minimum monthly payment, make additional loans payments, or pay off the loan early, you can save money on interest and lower the cost of the loan. 

Let’s Summarize…

If you’ve struggled in the past with late payments, repossession, or bankruptcy and your credit score has taken a hit as a result, you can probably still get a second chance loan to buy a used car. Though these loans often come with higher interest rates and additional fees, they can also help borrowers build their credit history and get a vehicle when they need one. Just be sure you understand the terms of the loans — including whether you’ll pay precomputed or simple interest — and can confidently make the monthly payment to avoid repossession or further damage to your credit. 

Also, shop around to see what your loan options are with different lenders, including your bank. And be sure to do your research to make sure you’re not overpaying on your car purchase.

Written By:

Attorney Tori Bramble


Tori Bramble is a bankruptcy attorney with over 20 years of experience. She is licensed to practice in Maryland and Virginia and has helped over 1,500 clients discharge thousands of dollars and find debt relief by filing Chapter 7 or Chapter 13 bankruptcy. A New York native, Tori... read more about Attorney Tori Bramble

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