Second Chance Loan

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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. Mortgage

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  3. Payment Shock

    The risk that a loan's scheduled future periodic payments may ...
  4. Subprime

    A classification of borrowers with a tarnished or limited credit ...
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    The act of giving money, property or other material goods to ...
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RELATED FAQS
  1. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  2. How can I use the funds from operations to total debt ratio to assess risk?

    The funds from operations (FFO) to total debt ratio is used in fundamental analysis to determine a company's financial risk. ... Read Full Answer >>
  3. How stable are municipal bonds?

    Stability is relative in the municipal bond market. Municipal bonds tend to be safer than many other types of investments, ... Read Full Answer >>
  4. Where can I find information about corporate bond issues?

    Information about new and existing corporate bond issues is published regularly in financial newspapers, such as The Wall ... Read Full Answer >>
  5. Why are high yield bonds typically lower rated bonds?

    The term "high-yield bond" is a bit of a misnomer. It is not the case that high-yield bonds tend to be lower-rated; instead, ... Read Full Answer >>
  6. How do I evaluate a debt security?

    Debt securities are a form of loan from an investor to the government or a business. Among the many different types of debt ... Read Full Answer >>

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