Almost every adult will purchase a vehicle at one time or another. While some may have the ability to buy a car with cash, most will need to take out a vehicle loan. Vehicle loans are unique to other lines of credit in that there are several types of loans you can get to finance your vehicle.
Before you make a car purchase, it is essential that you know and understand the types of loans available and which one will be right for you. If you don’t understand vehicle loans and their structuring, you could end up paying hundreds or possibly thousands more than you should purchase your vehicle. Here are ten types of vehicle loans for you to consider.
Secured Auto Loan
The vehicle acts as security for the debt so. If the borrower cannot make payments, the moneylender can repossess and resell the vehicle to recoup the losses. The legal arrangement for this type of loan is known as a lien.
The lender is registered as a lienholder on the car’s title, giving them the right to own the vehicle until the loan is repaid. This type of loan is how a lender can ensure they will get their money back, whether from the borrower or the resell of the car if it is repossessed.
Unsecured Auto Loan
Unsecured car loans are almost unheard of as most lenders will not issue a vehicle loan without collateral or a lien. However, some lenders will do this for buyers with excellent credit or who have proven trustworthy borrowers in the past.
Simple Interest Loan
A simple interest loan will have interest calculated on the money owed. Therefore, if you put a sizeable down payment or make larger payments than the minimum, you will owe far less because the interest is calculated on the amount of debt left.
For example, if a person paid a $30,000 loan down to $20,000, their interest will only be based on the outstanding $20K. In other words, a simple interest loan is a loan that is offered by lenders that allows a borrower to pay off their debt early to save cash.
Precomputed Interest Loan
With a precomputed interest loan, interest is calculated according to the loan duration and then divided into equal amounts spread over monthly payments. This way of calculating interest is considered more rigid than simple interest.
If a borrower-paid half of their $30,000 loan, they will still pay the same interest every month. Therefore, there is no financial advantage to early payoff or paying more than the monthly minimum.
Direct Financing
Credit unions, banks, and other finance companies give loans to their customers to purchase from a private party or a dealership. Direct financing loans allow the borrower to get pre-approved for the loan before going car shopping, generally with terms better than they can get through the dealership.
Direct financing is the best way to get a vehicle loan because you go shopping already knowing what your payments are and what type of vehicle you can afford.
Indirect Financing
Indirect financing is when the dealership obtains financing for a person looking to buy a car by requesting a loan from a potential lender. Indirect financing is more expensive because the dealership will add to the interest rate to make more profit on the sale.
These lenders are companies linked to a specific automaker or dealership and are not looking out for the best deal for the customer. However, sometimes you can better deal with these companies because they offer attractive incentives like 0% interest and rebates.
In-House Financing
In-house financing is a simple method of financing but can sometimes carry higher interest rates. In-house financing is based on a “buy here, pay here” concept. Therefore, the same dealership selling you the car will finance it.
While this type of financing is more expensive, generally, those with bad or no credit can get a loan and purchase a car. Most dealerships with in-house financing are second (or more) chance financing dealers with a target customer who needs a vehicle without good credit.
Used and New Car Loan
Loans for new and used vehicles usually have different characteristics based on the type and condition of the car and other factors. New vehicles are costlier as compared to the used ones because they have no wear and tear. New auto loans are usually longer than those for used vehicles because the used car’s life is less than that of a new car.
Auto loans for new cars often offer lower interest rates even though the vehicle is more expensive than a used car. That’s mainly because new vehicles are easier for lenders to value if they need to be re-claimed, though the risk of repossession is much lower.
Private Party Loan
Private party loans are for buyers looking to purchase a car from an individual seller instead of a dealership. These types of loans can vary depending on if the owner still owes money to the vehicle or not.
If the owner still owes money but is looking to profit, they will generally raise the monthly payments to be above what they are paying each month. If the vehicle is paid off, the owner can set any terms they would like. Most individual sellers are reluctant to do this type of lending because it is hard to recover payments or the vehicle if they default.
Lease Buyout
A lease buyout is when a person who is leasing a vehicle will opt to buy it. Generally, the payments made on the lease will be factored into the sale price. However, this will be dependent upon the dealership leasing out the vehicle.
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