One of the most significant barriers to getting a loan is having poor credit. A bad credit score can close the door to many loan opportunities. When a borrower is denied due to bad credit, then last chance loans for bad credit may be their only option.
These types of loans can potentially give people with poor credit a loan regardless of their credit history. In this article, we’ll talk about what a second chance loan is. We’ll also cover how they differ from other loans, and what you need to do to get one.
Many second chance loans are available in the form of installment loans.
An installment loan is a loan that is repaid through a series of scheduled payments. Each payment includes both the Principal (the original amount borrowed) and the interest. Many installment loans have fixed interest rates.
Installment loans provide borrowers with a lump sum of money they can use to purchase a large item. Many of the types of loans that we are familiar with fall into the category of installment loans. Some examples include:
These are loans that allow you to purchase a vehicle using your car as collateral. Auto loans are low risk for the lender because they are secured by the car.
A mortgage is a loan used to help you purchase a home. These loans are also low risk because the equity in the house secures them.
While car loans and mortgages are examples of secured loans, installment loans can also be unsecured—or issued with no collateral. Unlike mortgages and car loans, payday loans are given with very short terms and high interest. This means that payments will be higher than most other traditional loans.
If you struggle to make payments on unsecured loans, an installment loan might be the perfect solution. Since your monthly payment remains the same throughout your agreement, you’ll be able to better plan for the expense.
What Is A Second Chance Loan?
A second chance loan is a personal loan specifically designed for borrowers seeking loans with bad credit that would not allow them to get approved for a more traditional loan.
A second chance loan is similar to a payday loan. The difference, however, is that second chance loans are better suited for long-term, monthly payments. These loans also work as personal loans, meaning they don’t have to be paid back immediately. Instead, these loans can be repaid in equal monthly installments, which can be easier to manage.
To be considered eligible, applicants must have sufficient income. Second chance loans are also great options for people that have no credit history with any other lenders and may not even have credit at all.
When To Use Second Chance Installment Loans
In these times of financial hardship, people are often desperate to get personal loans. Credit card companies are the primary source of credit available to many, but this is not always available or affordable. A person that might have had $10,000 maxed out on their credit card can become a victim of predatory lending and need a second chance.
For example, if they receive an eviction notice and the landlord wants money, they may find it harder to scrape together enough cash to move. This is where a second chance loan comes in. These personal loans are generally offered in small amounts to people with low credit scores or a recent history of not paying bills on time.
First Things First: Know Your Credit Score
Second chance personal loans are for people that have bad or not-so-good credit. Do you know what your credit score is? If you don’t, you’re not alone. It’s common knowledge that bad credit can limit your choices for a personal loan, but many people don’t know what their actual credit score is, let alone where it comes from.
Before you look at any second chance loan opportunity, you must have the most transparent view of your financial profile. That means that you should understand the ins and outs of your credit score.
A credit score is an assessment of your overall ability to repay the debts you owe. Your credit score is an essential part of your financial life. It’s the key to whether you can get loans, how much you will pay for them, and even whether some landlords will accept you as a tenant.
Credit bureaus create credit scores—companies that analyze your spending habits and relationships with your lenders and creditors. They do their work by looking at five primary factors to determine your credit score.
Credit Score Factors
Payment History – This is a record of your late and on-time payments to your creditors. You’ll be shocked to find out what a small thing like paying your bills late can do to your credit score. Even just a couple of late payments can tank your rating. This is why it’s essential to pay your bills and make installment payments on time, always.
Credit Utilization – The amount of your available credit is in use. A good credit score has a utilization rate of 30% or below! For example, an $300 balance on a credit card with a $1,000 limit means that your credit utilization is 30%.
Credit History – A comprehensive listing of your past and current credit accounts. A long history of good performances can show lenders that your record in handling credit is clean and prosperous.
New Credit – Your score can be affected by the number of new accounts you’ve opened over a short period. Opening several accounts at once could negatively impact your credit score because it may look to a lender that you are in some financial trouble.
Credit Mix – Having a good mix of credit accounts is a sign of being financially responsible. A mortgage, credit card, and auto loan account are just some examples of what you might want to have.
Credit Score Range
The credit bureaus evaluate all those factors and calculate your credit score—a three-digit number ranging from 300–850:
- 800–850: Excellent Credit
- 740–799: Very Good Credit
- 670–739: Good Credit
- 699–580: Fair Credit
- 300–579: Bad/Poor Credit
Finding a loan that carries low interest and reasonable loan terms can be easy for people with good credit. Good credit indicates a history of paying bills and loan installments on time, so there is a strong likelihood that they’ll continue to do the same. On the other hand, bad credit shows a poor history of repayment, so a lender is more likely to give a person with bad credit a high-interest loan so that they can increase their chances of getting at least most of their money back.
About 20% of Americans—roughly 60 million people—have bad credit. So if you have bad credit, you are not alone. Second chance loans are not only another shot at getting the money you need; they are a way to fix old financial mistakes by building good financial habits.
In addition to providing funding, a second chance loan can give a person with bad credit an opportunity to make positive changes. If the installments are regularly paid on time, the borrower’s payment history will improve, dramatically affecting their overall credit score. With a better credit score, you can refinance a second chance loan into a new loan with lower monthly payments. Essentially, with a second chance loan, you are rewarded for paying on time with an opportunity to make it even easier to repay your loan!
The Cost of Second Chance Personal Loans
Even though it can provide financial relief when many other options are unavailable, second chance loans have some common characteristics that any borrower needs to be aware of before taking one.
First and foremost, these types of loans are like any other bad credit loan. Which means they can be expensive. And with the terms of some of these types of loans, the borrower’s cost may increase over time.
Let’s examine an example of a common type of second chance loan—an adjustable-rate mortgage, or ARM. These mortgages are given to bad credit holders with a short-term fixed interest rate, which means that the monthly payments will be the same for a certain amount of time—usually about the first three years of a 30-year mortgage.
The fixed-rate also offers a predictable monthly payment that can help the borrower re-establish their credit. But, when that period ends, the loan’s interest rate begins to float on a scale that responds to the bigger financial market, kind of the way a stock price rises and falls. With the installment payments now changing at almost any time, the loan payment can become unaffordable.
What To Watch Out For
When it comes to second chance auto loans, borrowers can also experience a situation known as “yo-yo financing,” where a buyer ends up paying more than expected in installments for the car.
Here’s how it happens: A person drives a car from the dealership without the financing being finished; although they may have a general idea of the cost of the loan, they did not sign any loan agreement. Then, days later, the buyer will hear from the dealership that the prospective third-party lender can no longer finance the car. So to keep the vehicle, the buyer must either pay a higher down payment or agree to a loan with a higher interest rate. If they don’t agree to either of those options, the buyer will most likely have to return the car. With that kind of “bait-and-switch” tactic, you can imagine how hard it might be to purchase a much-needed vehicle.
Payday Loan Traps
Payday lenders that offer second chance loans will charge the same kinds of super-high interest rates and fees that come with any other payday loan. When payday loans are not repaid by the end of their loan term, they are rolled over into new payday loans. But instead of these agreements being just an extension of the original loan, the balance is considered a new loan, which is then charged another round of interest and origination fees.
And if the loan isn’t repaid by the end of the new term, the process is repeated. As this interest compounds, it adds up to incredibly high balances that can cost the borrower much more to repay than expected. According to the Consumer Financial Protection Bureau, annual percentage rates on payday loans can reach as high as 400%.
Second chance loans can be the only option for many people with bad credit. But, because of their cost and commitment, a borrower should be confident that they are out of financing options with their banks or credit unions.
After the Loan: How To Raise Your Credit Score
Second chance personal loans can provide a path towards improving a poor credit score. A better credit score can mean better opportunities for several things, from better interest rates on loans and purchases to approvals for rental leases and job applications. Here are some of the best ways you can improve your credit score
Pay Your Bills On Time
When you want to rebuild your credit, you must make on-time payments for all your current obligations. This is because lenders are most concerned with getting their money back to them on their terms, so they need to see that you can repay the money promptly. Not only does this show responsibility, but also that creditors can count on you.
Virtually every creditor or lender will work with you to make sure they get their money. If you think you might have trouble completing your payment, contact your creditor within 30 days so you can work out a payment plan that works for both of you.
Get a Secured Credit Card
Why rebuild your credit by getting yet another credit card? After all, many people cite their credit card debt as one of their biggest financial worries. But a secure credit card is a great way to start moving the needle on your overall credit score.
A secured credit card is a safer way to use credit for both the creditor and the borrower. Unlike an unsecured card with a limit determined by the creditor, you can set your secured card’s limit. All you need to do is put down a cash deposit to ensure the line of credit—the creditor will issue a card with a limit equal to the deposit amount. So, if you deposit $200, your secured credit card will have a max limit of $200.
Secured credit cards can benefit those who have had trouble getting a card before. They typically come with higher interest rates, but they also help people spend responsibly and build a positive payment history. Just make sure that you always pay on time!
Check For Credit Report Errors
Credit errors can lead to a lower credit score, but don’t worry! With access to your credit report, you will be able to see a comprehensive list of your creditors and the outstanding balances on your accounts.
All three major credit bureaus allow you to file disputes quickly, and judgment usually takes about 30 days. And if you ever want to access your credit report, it’s free! Just visit any credit bureaus online or websites that offer free advice on rebuilding credit, like creditsesame.com.
The Bottom Line
Though having bad credit is problematic, it’s not insurmountable. In fact, with suitable credit repair options and policies, you can turn bad credit into great credit.
Second chance installment loans can provide an opportunity to help people build a record of making good credit decisions through paying installment loans. In that sense, second chance loans live up to their name. However, high-interest rates will always be a factor in loans for bad credit, so be sure that the loan you’re taking on is one that you truly need. The best way to use loans is to use them rarely, so be sure that the loan you need now won’t cause problems later.