Second chance loan
Second chance loan is a chance for borrowers with bad credit history to buy a property on subprime market. Usually borrowers that in the past had problems with timely repayments are not able to obtain new credit. In that case a second chance load comes into place. A loaner can help such a person, but usually for a much higher interest rate.
The second chance loan is planned, like most of mortgage loans for a long time (usually about 30 years). However, in most cases borrowers attempt to return them as quickly as reasonable possible because of high interest rate. If the borrower is able to obtain regular loan with lower interest rate he/she converts the second chance loan into regular one.
The second chance loans often have 3-year fixed rate (adjustable-rate mortgage, ARM). This can help in case of growing prices of real estates. But if someone bought property in 2007, in the beginning of the subprime crisis, he had to pay high rates for 3 years, even if he lost the job due to crisis.
In many cases it is less risky to rent a property than to buy it on subprime market.
- Schloemer, E., Li, W., Ernst, K., & Keest, K. (2006). Foreclosures in the subprime market and their cost to homeowners. Center for Responsible Lending.
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