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The truth about second and third chance credit

Article updated on 19/08/2019
If you have a bad credit rating, banks may refuse to lend you money. But other institutions will offer you loans all the same. They'll give you what the industry calls “second chance credit”. It may seem tempting, but pay attention to the repayment terms.


The truth about second and third chance credit
  • Second and third chance credit are a type of financing primarily aimed at people with a bad credit rating.
  • It’s a type of loan often offered by car dealerships, but you can also get a mortgage or personal loan this way.
  • Second and third chance credit are risky loans. Contracts are strict, interest rates are very high and penalties are severe.

What is second chance credit?

Second, third and even fourth chance credit are private loans intended for people who can’t borrow money from the bank because they have a bad credit. They’re usually a last resort.

Car dealerships often offer this kind of financing. Other lenders may also offer mortgage or personal loans.

Most of the time, second and third chance loans require a guarantor. And the interest rates are always very high, up to 29.9%.

Who are these loans for?

People with financial problems can be drawn in by this type of financing. For them, it can seems like a lifeline. But there are underlying risks.

What are the disadvantages?

When lenders “give” you a second chance at credit, they know they’re taking a risk. So they impose stricter conditions than usual. Their reasoning is simple: there is a significant chance that you won’t make your payments. They need to account for this risk to minimize their losses.

Take a look at the terms usually attached to this type of loan:

  • The purchase price may be inflated
  • The interest rates are sky high, often as up to 29.9%
  • There are sometimes “hidden” transaction fees
  • The repayment period is limited to 5 years
  • The seller may try to make you take out extra warranties or insurance

What are the risks?

If your finances are already tight, taking out a second or third chance loan won’t improve things.

First, it’s one more debt to deal with. Second, the astronomical interest rates and unreasonable conditions can increase the amount you need to pay so much that it blows your budget.

What’s more, when you purchase a vehicle with second chance credit, you could be forced to install a GPS locator or ignition interlock. Why? So that lender can stop your car from starting or even seize it, if you haven’t paid what you owe.

If I use it wisely, are there any advantages?

If you can count on regular income and know you’ll be able to make all of your payments on time, a second chance loan can help you rebuild your reputation as a reliable payer. Paying on time helps improve your credit rating. Of course, that’s if the lender offers you reasonable terms.

In the long run, a better credit rating will let you access traditional loans with normal interest rates.

But are there any other options for me?

Absolutely! Before applying for second or third chance credit, take some time to sit down and make a budget. How much money is coming and going out? It might be time to make some changes, rather than taking out another loan that will only increase your monthly payments. The pressure on your finances will only get worse.

If the purchase you’re considering isn’t absolutely necessary, you could also put it off for a while. That gives you some time to improve your credit score. Then you’ll have to financing that is much more advantageous.

Despite your efforts, your finances are still in bad shape and you feel like you’ve exhausted all your options? Help is available. Contact a counsellor in financial recovery. They can help you see things clearly and propose solutions to your financial problems. A consumer proposal, bankruptcy or even another alternative could release you from your debt… and your creditors.