Written by pps-DUEditor• April 12, 2021•
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Different Types of Car Loans Compared
Auto loans come in many different forms according to the vehicle in question, the needs of the borrower, and the lender. The main types of auto loans are listed below:
Secured Auto Loans
In this loan type, the car acts as the collateral for the loan. This means that if the borrower is unable to make payments, the lender can repossess the car and resell it to make up for the losses. A legal agreement known as a lien makes this possible to do. Until the loan is repaid, the lender has the right to possession of the vehicle as the lender is listed as lienholder on the vehicle’s title.
Unsecured Auto Loans
In this loan type, the lender relies more on the borrower’s promise to repay the debt without any collateral for security; such loans may come with higher interest rates and are less common.
Simple Interest Loans
In these loans, the interest amount is calculated based on the outstanding principal at the time of the payment. For instance, if you paid a $20,000 loan down to $10,000, your interest is only $10,000. This type of loan allows the borrower to pay off their loan early, thus helping them save money.
Precomputed Interest Loans
The interest amount is calculated for the loan duration and then divided into equal amounts, which are paid every month. When compared to the simple interest loan type, this method of calculating interest is more rigid.
Direct Financing
Lenders like online finance companies, credit unions, and banks provide loans to customers to buy their car from a private party or dealership. This allows the customer to get pre-approved for their loan before they buy a car, which will also allow them to shop around for the best loan deal.
Indirect Financing
In this type, a dealership requests a loan from a prospective lender, thereby arranging financing for a car buyer. The dealer, as the middleman, might even add a percentage point or two to the interest rate that the lender offers.
Captive lenders are finance companies that are connected to particular automakers, like Toyota’s Toyota Financial and Fiat Chrysler Automobile’s Chrysler Capital. These may offer attractive incentives like zero percent interest and rebates.
