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    Different Types of Auto Loans

    Financing a car may sound straightforward, but there are many types of financing to choose from.

    Auto loans often use language that isn’t easily comprehensible to borrowers between the financial terms, jargon, and more.

    Beyond these complexities, there are many categories and subcategories to choose from.

    Accordingly, it can get overwhelming when exploring the available options.

    Comprehending the different types of auto loans will ultimately increase your chances of negotiating a better deal along with accessing better rates and terms.

    Unsecured Auto Loans

    Unsecured auto loans are collateral or security-free loans.

    The lender doesn’t have the authority to repossess your vehicle in case of missed payments.

    If a borrower defaults on the payment, the lender has to pursue legal means to collect the debt.

    As a result of these features, the interest rates and related fees on unsecured auto loans are higher than other options.

    Secured Auto Loans

    Contrary to unsecured loans, lenders normally mark a lien on an asset of the borrower.

    This asset is the vehicle itself in most cases.

    Since the car is used as collateral, the lender has every right to repossess it if you miss your monthly payments.

    Once you pay off the debt, the lien is cleared.

    Due to the inclusion of collateral, borrowers can access lower interest rates and more flexible payment terms for this type of auto loan.

    Precomputed Interest Auto Loans

    With this type of auto loan, borrowers stick to a defined payment schedule.

    This schedule has the entire outstanding amount divided into monthly payments that cover a portion of the principal amount and interest.

    The payment calculation is very rigid and doesn’t help to save borrowers much even if you want to pay off the auto loan earlier.

    A pre-computed loan might be the best option if you have a restricted budget and desire a predictable repayment schedule.

    Simple Interest Auto Loans

    This type of loan accrues interest periodically.

    During the term, interest is calculated based on the total outstanding principal of the auto loan.

    Borrowers have the option to pay off larger portions of the principal, thus lowering the interest paid.

    If you’re looking for some breathing room, simple interest auto loans may help reduce your total credit utilization.

    Title Auto Loans

    This type of secured auto loan is only for people who own the car.

    It’s similar to a home equity loan wherein you’re allowed to borrow the equivalent value of your car.

    The lender marks the car lien and owns the title temporarily.

    You can still use the car but the lender has complete authority to repossess the vehicle if you default on payments.

    Lease Buyout Auto Loans

    If you are driving a car on a lease, this is the best option for you.

    When you lease the car, you don’t own it.

    Still, if you plan to own it after the end of term, you can opt for a lease buyout auto loan. The lender will buy out the lease and you’ll be allowed to pay fixed payments over the term.

    Once the debt is settled, the lender will remove the lien and you’ll own the vehicle.

    In-House Financing

    Dealerships sometimes finance loans directly at their premises.

    In-house financing offers a quicker method with more benefits including adjustable interest rates and extended warranties.

    For those with average to poor credit scores, it's a great option.

    It doesn’t guarantee a lower rate of interest and can tend to lead to higher payments over the life of the loan.

    Indirect Financing

    Any financing that you get via the dealer, from their partners or 3rd party lenders, is called indirect auto loans.

    The process usually begins after you visit a dealer and select the car.

    Based on the car’s cost, the dealer will check for available loans and let you know the options.

    Direct Financing

    Credit unions, banks, and other private lenders offer direct financing.

    Borrowers can get preapproved for an auto loan by providing the required documents.

    These requests are directly processed and frequently enable online application and approval.

    New and Used Auto Loans

    Interest rates are comparatively lower on new auto loans.

    Borrowers can get new auto loans through banks, private lenders, and car dealerships.

    In the case of new auto loans, you might find offers with zero-interest rates.

    With used auto loans, there isn’t necessarily as much benefit given the declining value of used cars due to depreciation and lower resale values.

    Deciding Which Auto Loan to Choose

    There are many variables and variations of auto loans worthy of consideration before applying.

     Still, even with options designed to match each borrower’s unique financial circumstances, it’s very important to note that the interest rates and terms will vary by lender.

    Ultimately, we recommend that you shop around for rates to make the most informed vehicle financing decision.