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.

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