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What is a Second Chance Loan?

Malcolm Tatum
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Updated: May 17, 2024
Views: 2,132
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Second chance loans are financing arrangements that are designed for borrowers who have less than perfect credit ratings. The idea behind this type of loan arrangement is to provide an individual or entity that has experienced financial reversals in the past the opportunity to begin rebuilding a healthy credit history, and offset some of the unfortunate events that led to the damaged credit. Typically, a second chance loan carries a higher rate of interest, because the lender is assuming a greater amount of risk.

The typical second chance loan is considered a form of subprime lending. Essentially, a subprime lender works with people who need the financing, but are not the best credit risks. One example of a subprime loan is what is known as a 3/27 adjustable rate mortgage. As with other mortgage types, the 3/27 ARM is usually structured to provide financing for an extended period of time, often thirty years. The difference is that if the borrower consistently makes payments on time for the first two to three years, and does not amass a lot of additional debt with credit cards and other financial debt instruments, there is a good chance that the loan can be refinanced. With the refinanced mortgage, the borrower enjoys a more competitive rate of interest that makes it possible to pay off the debt in a shorter period of time. As a bonus, his or her credit rating improves significantly improves in the interim.

There are lenders who offer second chance loan programs that can also manage the refinancing after the borrower’s credit rating improves sufficiently. When this is the case, the process of refinancing is somewhat uncomplicated and may take very little time. Lenders do not always proactively notify second chance loan clients when they become eligible for refinancing, so it is very important for borrowers to track the status of their credit ratings and initiate the discussion about refinancing as soon as the ratings make that option feasible.

When considering the possibility of a second chance loan, a borrower must look closely at all the provisions contained in the loan contract. There should be no misunderstanding about how the interest rate is compounded and applied, what happens to that adjustable rate in the event that payments are late, and what types of other fees and charged may apply at some point during the life of the loan. It is also a good idea to discuss with the lender how payment histories are reported to credit bureaus, since some lenders do not provide monthly updates.

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Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

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Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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