Second Chance Loans – Everything You Need To Know

Written By: Megan Miller
Reviewed by: Mike Reyes
Last Updated January 27, 2022

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a person who found the difference between what's true and myth about her credit score

A second chance loan is a unique loan offered to those with a poor credit history. This can limit the types of loans that someone can apply for, and they may not qualify for a traditional loan. 

Second chance loans are the way out. They give you a chance to be able to rebuild your credit history and your credit score. This gives you the chance to be more attractive to potential lenders in the future. 

On the downside, they will typically have higher interest rates than a majority of other loans, as you will be compensating the lender for taking on your higher-risk loan.

These are often known as second chance mortgages. In the long term, the additional interest on these loans can be massive by the time it has been repaid. This is why they are usually the last resort. And why, for the most part, they are a second chance.

Second chance loans can help encourage people to become more financially aware. This is because the loans force you to improve your money management in order to repay the lenders in regular installments. Here is everything you need to know about second chance loans. 

How Do Second Chance Loans Work?

a man researching how second chance loans work

Although you can get long-term SCLs (Second Chance Loans), like a 30-year mortgage, most lenders offer short-term services instead. This is because of the increased risk that banks and lenders are taking by working with someone who may have a lower credit score or poor repayment history. 

The idea is that you borrow a small amount of money, and pay monthly on-time payments for the minimum amount. 

This positive interaction with lending will build your credit score, slowly but surely.

The higher your credit score number is, the better. These short-term loans can help you bring those numbers up one by one, at the same time as lending you money.

Eventually, your credit score will be so much better than you can look for loans with lower interest rates. Once accepted, you can pay off the SCL with a cheaper loan.

As this second loan is cheaper, you will be able to pay off your debts quicker. 

Some lenders can offer you even smaller loans, asking for them to be prepaid in just a week. This quick burst of positive lending can make a small repair to your credit score, without demanding months of your attention.

Hopefully, this shows you that SCLs can be helpful, and genuinely give you a second chance. However, you need to consider the interest rates before you commit to anything. If you are already struggling financially, then adding to your money woes with a new loan might not be the answer. 

Remember that SCLs are very expensive, and should be used with caution. They are called second chance loans for a reason, and you should be aware of the potential consequences as well as the benefits that they can provide. 

Pros And Cons Of Second Chance Loans

We want to give you as much help as possible. That is why the pros and cons have been clearly laid out for you. Hopefully, this will allow you to decide whether a second chance loan is a right choice for you, and be aware of the short-term and long-term implications. 

Disadvantages of Second Chance Loans

When a lender offers you a second chance loan, they already know that you are a risk. This usually means that your credit score is low, and you are likely to stop paying them back at any time in the future. People do this for a number of reasons, and it should not reflect poorly on you if it can be avoided. 

There could be a myriad of reasons for why your credit history is suggesting that you are more of a risk to the lender. Anything from medical issues disrupting your pay, redundancy, to an inability to manage your money in general. 

If you feel that you do not have the correct tools to handle your finances, there are plenty of resources available online to help you feel more equipped. 

Whatever the reason you are considered a risk, lenders will want some assurance that they will get their money back. There are several areas where they will charge you more, which have been listed below. 

High Purchase Price

This means that entering into the loan will cost more than normal. You may be faced with a high initial cost that may seem to make little sense. If you are entering a second chance loan, then it is more likely that you will have to pay a given amount after signing the contracts. 

High Interest Rates

Interest rates reflect how much you need to pay regularly. It is a percentage of the total amount owed which is used to compensate for the prolonged time period of repayment. This is typically added to the total amount to pay. While interest rates are typically low, some loans, such as second chance loans, can have higher rates. 

Some loans offer a 0% interest rate for the first couple months, whereas others jump straight to 29.9%. Normally, you would shop around for the lowest rate. If your credit score is low, however, you may just be happy with an acceptance due to the reduced options. 

Hidden Transaction Fees

Technically, lenders are not allowed to hide additional fees. However, they may put the information somewhere you wouldn’t necessarily read. For example, putting it in the contract without talking to you about the details. 

It’s important to avoid this as much as possible, and being aware that it is something that lenders may do. To make sure you don’t fall victim to these tricks, read every document in detail. As long as you know what you’re signing up for, you can make a budget for the loan.

Limited Repayment Period

As you are a risk, the lender may restrict the lending time. This means you cannot ask for an extension, and if you fail to pay the lender may resort to debt collectors. Before you agree to a loan, prepare yourself for the original term time.

If you already know that this term time is too short for you and that you will not be able to pay the lender back, do not accept the loan. Try to be realistic with the repayment period and amounts, because there is no point entering a contractual agreement for something that you cannot afford. 

Additional Insurances And Warranties

Warranties and insurances are not a bad thing. However, at some point they become unnecessary. For example, if you need this loan as you were laid off, you should not accept an insurance policy that bails you out if you lose your job. 

Because you signed up without a job, it would be considered void as soon as you signed the contract.

Another Debt To Deal With

If you have a bad credit score, then you likely have debts already. Adding another loan to the mix means increasing your overall payments. Along with the additional costs involved with the SCL, this could be too much for you financially.

It’s important to avoid entering into something that means you will struggle to put food on the table or make ends meet. Try to focus on paying off your existing debts if possible before entering into an SCL agreement. 

Advantages of a Second Chance Loan

Improve Your Credit Score

If your financial situation has changed, and you know you can handle your money, then a second chance loan can help you prove it. The whole point of an SCL is to offer you a loan, even when no one else will, and then allow you to pay back the money. Paying the right amount, on time, is all it takes to increase your credit score.

If you can confidently manage your money in this way, then a second chance loan would be perfect. Part of the name comes from the idea that you are given the opportunity to redeem yourself and prove that you have a better relationship with your finances. 

Gives You Better Options In The Future

As the SCL allows you to grow your credit score, you’ll notice more options start to become available to you. When the loan is paid off, you will have secured yourself a cheaper loan in the future.

Having access to a higher range of loans can make the world of difference. These include securing a better rate on a mortgage, or more flexibility with future loan repayments. Working on your credit score can allow you to secure a more financially stable future which can allow you to rest easy. 

Being Accepted For A Loan

Lastly, an SCL will allow you to borrow money. If everyone else is rejecting you, and you need the money, a second chance loan will be able to help you. For some people, SCLs are the only option, and it is therefore imperative that they exist, and that more people are aware of them. 

Don’t take this for granted, and try not to fall back into financial worry, but an SCL may be your best chance for money.

Where Can You Borrow Money In A Hurry?

If you are in a tight spot and need money in a hurry, you may want to look at different types of loans to help. Sudden medical emergencies, death of a loved one, high-cost utilities that need replacing, and so on. In these cases, you will want to get the money as soon as possible. 

A second chance loan is a serious loan, which can help you build your credit score. It shouldn’t be used as a quick fix. Instead, you may want to look at options such as payday loans and pawn shops. 

One option you have to get money fast is to get a personal loan from an online lender. Online application processes tend to move faster than other loan applications. has loans for bad credit. You can also use loan apps or a cash advance from a credit card. Loaning from friends and family or even getting a pawn shop loan is also an option. 

Payday loans offer you money and request a re-payment with your next pay packet. For example, suppose you are near the end of the month and your wage is almost spent. Then, in a horrible twist of fate, your car breaks down. The mechanic wants the money upfront, but you don’t have any cash left.

You can get a payday loan, which will pay you instantly, and when your next paycheck arrives, you can pay off the loan.

Pawnshops can also offer you quick cash. You go into one of these shops with a valuable item, they value the item and give you a loan based on it. They then request that you pay back the loan after a month or so.

If you fail to repay the loan, they will sell your item. If you pay back on time, the item is returned to you.

For quick money, we suggest using those loans and money borrowing options, as they tend to be lower in value than a second chance loan. That being said, they are often just as expensive and have their own range of risks in addition. 

When To Use A Second Chance Loan

Ideally, there are two times in your life when you might use a second chance loan. The first is when you have just dipped into financial problems and want a quick handout. The second is when you have been in financial trouble for a while, but have managed to settle your debts. 

If you have found yourself in a hard financial situation, and realize you have been approaching the dangerous territory of debts, you can use a second chance loan to square up.

A regular loan would be a better first choice, but if you’ve fallen behind on bills then this may no longer be available to you. Using a second chance loan could give you the help you need while you find financial stability.

However, the best use for a second chance loan is the second option we suggested. When your employment is giving you regular payments, your debts are cleared, and you just want to improve your credit score, use the SCL. With nothing else available to you, and no debts to worry about, a short SCL can be all you need to boost those numbers.

How Do Second Chance Loans Affect My Credit Score?

Before we can explain the delicate dance of loans and credit scores, we need to make sure you understand the system.

What Is A Credit Score, And Why Does It Matter?

A credit score is a number that reflects your credit history. This includes the debts you have, any payments you missed, the number of loans or credit cards you have open, and if you have ever been bankrupt.

To generalize, these factors are then turned into an easy-to-understand 3-digit number. The higher the number, the better you are with credit.

Your credit score and credit history are filed and created without you needing to do anything. This means that lenders can see your borrowing ability without asking you to show your banking information.

The better the score, the cheaper your interest rate will be. This is because you have proven yourself to be low risk. Higher credit means that banks and other lending sites are more likely to provide you with more options for repayment periods, the amount borrowed, and interest rates because you are more trustworthy and reliable than someone with a lower credit score. 

What Factors Into Your Credit Score?

Generally speaking, there are 5 factors that alter your credit score. We will briefly discuss them in order of importance.

Payment History

If you pay your credit card, bills, mortgage, or anything else late, then this will show up on your credit history. You might think that a one-time late payment isn’t a big deal, but in reality, it can massively affect your credit score.

Payment times are what tell lenders how responsible you are. Fail to pay, and your risk level increases, making lending more expensive.

To keep your credit score high, pay on time.

Debt-To-Limit Ratio

Also known as your credit utilization, your debt-to-limit ratio is the percentage of credit being used. For example, if you have a $1,000 credit card, and spend $500 a month on it, your ratio will be 50%.

Ideally, you should keep the ratio at 30% or less. This is over all of your debts. A lower debt-to-limit ratio means you are living comfortably in your means, and aren’t relying on loans to make ends meet.

Long Term Credit History

If you have a history of good credit, then this will work in your favor. The lenders understand that people make mistakes, and bad luck can fall on anyone. 

This means that if you normally pay on time but have recently fallen behind, then your long-term record will keep your score from dipping too far.

New Credit Lines

When you open up a new line of credit, whether a credit card, a loan, or a store card, your credit score will dip. This is because you’re telling the lenders that you need more money. Normally, it won’t be much, and it will go back up again after a month or two. 

However, if you take out lots of credit in a short period of time, you’ll quickly find your numbers dropping. The more you do this, the longer it will take to bring your numbers back up again.

Mixed Lines Of Credit

The more varied your lines of credit are, the better your score will look. The most common mixtures are credit cards, student loans, and mortgages. The variation of credit shows the lenders that you can handle different credit payments. 

Having mixed lines of credit also helps build a profile as a well-rounded person who takes their finances seriously. This is because of the variation of payments that you have prioritized repaying over time, rather than just aiming to pay one off completely. 

Credit Score Ranges

Unfortunately, there isn’t a unified version of credit scores. There are dozens of credit bureaus across the country, that will rate your credit history and offer you different scores.

Don’t be alarmed by this. All of them will follow the three number system, and they all value the factors listed above. However, each of them will fluctuate to consider their own additional factors. 

For example, one credit bureau might believe that 10-year-old late payments are still worth noting, while others dismiss them after just 7 years.

Normally, a credit score will range from 300 to 850. 800 and above would be an excellent credit score, while 300 to 600 would be considered poor.

As each credit bureau measures your credit history differently, these numbers may vary. The bureau will clearly label your number as either Poor/Bad, Fair, Good, Very Good or Excellent.

How Do Second Chance Loans Affect My Credit Score?

So back to the original question, how does an SCL affect your credit score? 

When you first take a second chance loan out, your credit score will dip. As we explained earlier, this is because new credit suggests you are struggling financially. However, after a month or two, your score will go back to normal.

Then, after a couple of months of on-time payments, your credit score will gradually start to increase. Depending on your credit history, these increases may be minuscule or dramatic. Remember that you will be competing with your long-term credit history.

As long as you keep on top of your payments, your score will increase over time. 

Are Second Chance Loans Easy To Apply For?

Depending on what you need your SCL for, and how you plan to use the money, it could be worth shopping around in order to decide what option would be best for you. 

There is a great deal of variation that exists within the world of SCL, with many providers nowadays. Depending on which money lending service you choose will determine how complex or simple the application process is. 

However, second chance loans are usually much easier than other loans because of the soft credit checks that are typically done. These are brief background checks that do not take as much time to carry out as credit checks. 

Soft credit checks are usually done by online SCL services and will take into account any existing credit concerns before approving your request. Compared with traditional loan applications, SCLs are fast and simple. However, in comparison to fast cash loans, they are a little more time-consuming. 

What To Look Out For

Security is a big concern for those that apply for an SCL online. It can be easy to give away personal information or banking details to the wrong person, and it’s worth being aware of how scammers work. 

For this reason, we would recommend going with a supplier that has many positive reviews, and that has a reputation for being trustworthy and reliable. 

Again, make sure to read the contract thoroughly to ensure that you will not be faced with additional charges after signing. Once you know what you are agreeing to, you can start working towards an improved credit score over time. 


There is a range of advantages and disadvantages that a second chance loan can bring you. While it may not be the best option for everyone, it can provide a lifeline to those who need it. 

Second chance loans are an opportunity to prove yourself and regain some level of control over your finances. Over time, you will begin benefitting from improved credit scores through better mortgage rates and loan repayment flexibility. 

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