DEFINITION of 'Second Chance Loan'

A type of loan associated with subprime lending and borrowers with a tainted credit history. Second chance loans offer a borrower a chance to rebuild their credit history. Although subprime loans might have a typical term-to-maturity (30 years of a mortgage), they are usually intended to be short-term financing vehicles that allow the borrower to repair their credit history to the point where they can refinance into more favorable loan terms. Borrowers must compensate the lender for taking on more risk in lending to them by paying a higher interest rate, thus the incentive for the borrower to refinance as soon as they are able.

BREAKING DOWN 'Second Chance Loan'

While second chance loans can be of great benefit to borrowers with a tainted credit history, borrowers need to fully understand the risks of such loans. Since many of these loans are intended to be short-term financing vehicles only. They might carry a substantial risk of payment shock if the loan is no able to be refinanced within a borrower's intended time horizon. Borrowers need to identify and understand the risks associated second chance loans such as a 3/28 ARM.

RELATED TERMS
  1. Subprime Lender

    A type of lender that specializes in lending to borrowers with ...
  2. Subprime

    A classification of borrowers with a tarnished or limited credit ...
  3. B/C Loan

    A classification of loans associated with the borrowers that ...
  4. Subprime Loan

    A type of loan that is offered at a rate above prime to individuals ...
  5. Character Loan

    A character loan is a type of unsecured loan that is made on ...
  6. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
Related Articles
  1. Investing

    Subprime Lending: Helping Hand or Underhanded?

    These loans can spell disaster for borrowers, but that doesn't mean they should be condemned.
  2. Personal Finance

    Personal Loans: Consider These Alternative Lenders

    Looking for an alternative source of financing for a personal loan? Take a look at these companies.
  3. Personal Finance

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
  4. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  5. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  6. Investing

    Financing Basics For First-time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
  7. Personal Finance

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  8. Personal Finance

    How To Apply For a Personal Loan

    Learn about different avenues for applying for a personal loan, and learn valuable tips to help you get your personal loan application approved.
  9. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  10. Investing

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
RELATED FAQS
  1. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  2. What are the typical requirements to qualify for closed end credit?

    Learn what closed-end credit is, and the various requirements that borrowers must meet in order to obtain a closed-end credit ... Read Answer >>
  3. How much risk is associated with subprime mortgages?

    Discover the risks associated with subprime mortgages. Find out whether taking out a subprime mortgage on your home is really ... Read Answer >>
  4. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ... Read Answer >>
  5. How do construction loans work?

    Construction loans are obtained either by the prospective home owner or the actual builder. There are two types of construction ... Read Answer >>
  6. Why do high profiting sales mitigate credit risk?

    Learn more about credit risk in loaning to individuals and businesses. Understand how credit risk is determined and the impact ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  6. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
Trading Center