During the Covid-19 pandemic, many people had to suffer through decreases in revenue or even job loss. These changes in revenue have impacted the credit score of many individuals who are incapable of affording their old standard of living, making the process of taking out a loan at the bank more difficult than ever. Unable to make ends meet, these people may go to different lenders for a “second or third chance” credit. But are these really as good an option as they seem? Below you will find the truth about second and third chance credit and the dangers these types of loans may incur.
What is a second or third time credit?
Second or third time credit are loans that are offered to those who have a bad credit rating and whose requests for loans at the bank have been rejected. These types of loans are usually offered by specialized financing companies and car dealerships and are therefore mostly used for purchasing a vehicle, mortgage loans, or personal loans. When it comes to paying off your second or third chance loan, the consequences are the same as traditional loans — if you’re unable to pay it, the lender can report your loan as delinquent to Equifax and TransUnion and, after a certain time, your account can be sold to a debt collection agency.
But if the consequences are the same as a traditional loan, why not go for it?
A 2nd or 3rd chance credit loan is no favor. The interest rate charged can be outrageous.
Watch out for interest rates
You would think that if you’re facing financial difficulties, that a second or third chance credit would offer you lower interest rates than those from a regular bank. Unfortunately, that’s not the case. Often times, second chance credit interest rates are incredibly high, sometimes as high as 29.9%! While it may seem counterintuitive that these loans that are geared towards people who have financial issues have higher interest rates, lenders do this in order to ensure profitability since there is an increased risk for them to be lending them money. So if you’re already struggling financially, it might be best to reconsider a second chance credit, since the cumulative interest will add up to a significant amount in the long term.
Watch out for hidden fees
Before you apply for second chance credit with a specialized financing company or car dealership, do your homework on your prospective lender and read your contract thoroughly. You should also always inquire about the relevant fees and whether it would be possible for them to be lowered or waived. These hidden fees can include things such as application fees, inflated purchase price, processing fees, ongoing administration fees, loan insurance fees, closing fees, and more. Over the duration of your repayment period (limited to five years), these hidden fees can cost you upwards of thousands of dollars! So make sure you read the fine print before accepting the terms.
There are other solutions that can get you out of the debt spiral and rebuild your credit for the long term.
Are there any other options?
Taking out a second or third chance loan would not help you if you’re already struggling financially. The strain on your finances would only get worse. Before making any rash decisions, try to draw up a budget and make some adjustments to your spending habits.
If your reason for applying for a second or third chance credit isn’t of utmost importance, try to see if you can postpone it and focus on improving your credit score instead. Improving your credit score would allow you to have access to more favourable funding.
If your finances are still in disarray despite your best efforts at keeping them afloat, rest assured that there are many options available to you. Contact a licensed insolvency trustee for a free and confidential consultation. Your trustee will take a look at all of your finances and tell you what the best solution is for your personal situation.
