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What is a second chance credit?

27 April 2018 by National Bank
second chance credit

Do you have problems with your credit and need money to carry out a project? Would you like to borrow money, but a traditional loan is impossible? A second chance credit could be the solution for you.

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A second chance credit is for people whose credit report is bad. This could be the case if you have, for example, gone bankrupt, accumulated payment defaults or if you have already made a consumer proposal offer to your creditors.

The main advantage of a second chance credit is that it allows you to access a loan that would otherwise be impossible for you to obtain. In certain cases, the lender may require you to have an endorser.

When should you use a second chance credit?

You can use this type of credit to purchase a vehicle, a personal loan or a mortgage loan. By demonstrating that you can honour your commitments, a second chance credit can also help to rebuild your credit history and improve your credit report. In the long term, you could improve your ability to take out traditional loans.

The consequences of a second chance credit are the same as those of a traditional loan. It is treated the same way as all other methods of financing.

Exercise caution

Second chance credit requires caution, especially if you are experiencing financial difficulties. Because lenders take on increased risk by granting you credit, they set rates and conditions to ensure profitability for their operations, even in case of payment default. High interest rates and transaction fees can add to your already tight finances.

In the case of a second chance mortgage credit, the total interest can be a considerable amount in the long term. To limit interest fees, you could consider the possibility of obtaining a shorter term to try to improve your credit score. By doing so, the interest rate on renewal could be more advantageous.

Regulations established by the lender

By choosing a second chance credit, you are limiting your options for available rates and terms that don’t typically exceed five years. A lender can offer you a loan whose only requirement is to pay off the interest monthly.

In the case of a mortgage loan, it can impose a variable rate, instead of an often more advantageous fixed rate. You may have to juggle large increases in your monthly payment in response to rising interest rates.

Before applying for a second chance credit

Whether it’s a second chance at auto credit, personal credit or mortgage credit, it’s important to establish a clear budget before you apply. Make sure that you are able to make your required payments. You should also calculate the total cost of your purchase, including fees and interest. With these figures in front of you, you can better evaluate if this option is really worth it.

If you decide to delay your purchase, take that time to try to improve your credit score. It’s a win-win situation. Here are some ways to improve your credit score:

  • Make your payments on time.
  • Verify if your credit report contains errors and correct them if necessary.
  • Repay the balance on your credit cards.
  • Avoid maintaining a credit card limit that is too low. It’s better to have a higher, unused credit limit than to have a full card with a lower limit.
  • Avoid getting another credit card if you already have several.
  • A second chance credit can be a useful tool to obtain financing when a traditional loan is not possible, but you should use it wisely and always make sure you are able to pay it back.

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