Second Chance Loan

AAA

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.

INVESTOPEDIA EXPLAINS '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. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  2. Subprime Lender

    A type of lender that specializes in lending to borrowers with ...
  3. 3/27 Adjustable-Rate Mortgage - ...

    A type of adjustable-rate mortgage (ARM) frequently offered to ...
  4. Creditor

    An entity (person or institution) that extends credit by giving ...
  5. Loan

    The act of giving money, property or other material goods to ...
  6. Payment Shock

    The risk that a loan's scheduled future periodic payments may ...
Related Articles
  1. 4 Steps To Attaining A Mortgage
    Credit & Loans

    4 Steps To Attaining A Mortgage

  2. ARMed And Dangerous
    Insurance

    ARMed And Dangerous

  3. How Mortgage Refinancing Affects Your ...
    Credit & Loans

    How Mortgage Refinancing Affects Your ...

  4. Understanding Your Mortgage
    Personal Finance

    Understanding Your Mortgage

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center