If you have a bad credit score, you know that it doesn’t always reflect your current financial status. It’s frustrating how many lenders may use this criterion to deny you an auto loan. Luckily, you can get a second chance loan when struggling with credit problems.

Second chance car loans are ideal for you if top-tier lenders have turned you down. In fact, they are among the financial solutions that give 60 per cent of car loan customers in Australia great value for money. Though they come with high-interest rates, they come in handy when you desperately need a car loan.

With second-chance auto financing, the lender may consider your employment status, income, and expenses. Some may require you to make a down payment, while others may not. Unlike conventional loans, the lender won’t report your payments to the credit bureaus.

A low credit score shouldn’t stop you from getting a car loan. Just like other types of car financing, you have to consider certain factors when shopping for second-chance loans.

Assess Your Income, Expenses, and Debt

The lender will compare your monthly expenses with your monthly income before approving you for the loan. They will use this strategy to assess your financial ability to make payments. You should thus evaluate your income, expenses, and debt before approaching your lenders.

Review your existing debt obligations to see whether they can prevent you from getting a loan. Note that your expenses and income will determine the amount of loan to be awarded. The lender will also use this information to set the interest rates, down payment, or additional fees.

It may be less convenient to get a second chance car loan if you have existing debt obligations. Pay off the debts first and clear any other financial commitments before shopping for the loan. You should also start tracking your expenses, even with bad credit.

Determine the Amount You Can Borrow and Afford

Figure out the type of car (and its price) that you want to buy with the loan. Use this figure to set a borrowing amount to facilitate the purchase. You should also determine how much you’ll afford to pay every month.

Depending on the lender, you may need to put a 20 per cent down payment on the loan. The monthly payments will reduce if you can pay more upfront fees. Check whether you can pay the down payment before getting the loan.

Choose a convenient borrowing period to avoid overspending on the monthly payments. If you choose a longer period, the monthly payments will reduce. However, you risk paying an amount that’s higher than the car’s actual value.

Approach Multiple Lenders

Your options for second chance car loans are only limited to a few alternative lenders. Expect the lenders to have different offers on this subprime financing. Check out their loan amounts, interest rates, borrowing period, and terms.

Compare loan quotes from the best second-chance lenders to get a fair deal. Most of them usually offer free quotes on their websites to help inform your car financing decisions. Only get the rates from a lender covered by the Australian credit licence.

Ensure that the broker or dealer allows funding from your lender. You should also familiarize yourself with car financing language as you review the quotes.

Get Preapproved for the Second Chance Loan

You can either be pre-approved or pre-qualified when applying for a second chance loan. It’s thus important to understand what each term means in the lending process.

With a pre-qualification, you get an estimate of the loan amount and rate that you qualify for. The lender will rely on your income and expense statements to give you the estimate.

A pre-approval, on the other hand, will require detailed information about your financial status. The lender will use your data for the estimate.

When you get pre-approved for a second chance loan, you can negotiate a better deal. You also get to avoid inflated rates since the lender already knows about your ability to repay.

Note that both pre-approval and pre-qualifications don’t guarantee that the lender will approve the loan. You can use them to plan and budget for your car. A pre-approval will indicate to the auto dealership that you can secure financing to buy a vehicle.

Compare Pre-approval Offers

Take up to two weeks to gather pre-approval offers from different lenders. Compare each offer to find one that suits your monthly budget. Only choose one with the shortest repayment term and the lowest annual percentage rate.

The interest rates for the loan may either be simple or precomputed, depending on the lender. Choose a financing solution with a simple interest rate charged on the outstanding balance. A precomputed rate charges a set interest regardless of your monthly payments.

Set a Budget Using the Loan Offers

The lender will state the maximum borrowing amount in the pre-approval offers sent to you. These offers won’t give you the price of the vehicle you wish to buy.

You should thus budget for the car using this estimate. Allow for an extra 10 per cent of the amount to cater for fees and taxes.

An online car loan calculator should help you set a budget for your car. Always consider the vehicle’s current value, down payment, and lending terms to find an affordable monthly payment.

If the monthly payment seems too high for you, remember that a pre-approval amount is just a limit. You have the freedom to settle for a lower amount. The lender will also allow you to make the payments on a comfortable schedule.

Review the Loan Terms and Conditions

The loan contract should identify the parties involved and their unique responsibilities. It should also inform you about the length of the agreement. The agreement must protect you against unfair contract terms and any liabilities that follow.

Check whether the agreement spells out all the loan details before signing it. Ensure it states the interest rates, fees and repayment terms to know what’s expected of you. It should also prevent the lender from charging high fees or raising your rates.

A loan contract can help you negotiate a fair deal since it lists fees you can avoid paying. These fees may include a prepayment penalty, a monthly maintenance fee and an application fee. You can use it to prove to the tax authorities that the received funds are a loan rather than a gift.

Accept an Offer

Only accept a second chance loan offer that meets your car financing needs. You should avail proof of insurance, proof of income and driver’s license for loan processing. The lender may require you also to give proof of residency during the process.

Remember to accept the lender’s terms and conditions in writing. The loan provider will then send you a letter stating the loan amount, terms and type. They’ll also inform you about the cost/fees and any security needed to secure the funds.

Consult with a lawyer before agreeing to the loan terms and conditions. Legal advice will be important if you are unfamiliar with the language used in the contract.

Find Your Ideal Car

Once you’re aware of the maximum loan amount, choose a car within that range. Confirm whether the lender has excluded certain car brands from their funding. The loan provider may also require you to only shop for the vehicle through dealerships.

Either way, choose a car that you can pay with the loan amount. You may shop for it from a dealership or a private party, depending on your preferences. Ask the seller whether there are other additional costs on the car and whether they can allow you to finance it with a loan.

Be cautious about the time restrictions given on the loan. That’s because most lenders give you up to 30 days to use the funds and may not be willing to extend the timeframe.

Automate Your Payments

Depending on the lender, you may qualify for a small interest rate discount when you choose to automate the payments. With this system in place, the loan provider will automatically deduct money from your bank accounts on a date of your choosing.

You can set up the feature through your lender’s mobile app or website. Ask the loan provider whether any rate discounts come with this incentive. You should also find out other requirements needed to qualify for the deal.

Your lender can also agree to adjust the monthly payments depending on your financial situation. For instance, you may make high monthly payments when your income is high. Note that making high payments will reduce the borrowed amount.

Get a Second Chance Car Loan Today

Not every loan provider will be willing to help finance your car if you have a negative credit history. A second chance car loan is an excellent alternative to traditional loans if this case applies to you. Stick to the tips discussed in this guide to find one with the best interest rates and a shorter repayment period.

Count on C1 if you’re looking for financing solutions, but your credit score won’t let you approach top-tier lenders. We will assess your situation and finance your car with no hidden agendas or fees. Don’t hesitate to apply for a second chance loan today from C1 to buy your dream vehicle.