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What Are The Different Types Of Auto Loans?

What Are The Different Types Of Auto Loans? English Article

If you want to acquire an auto loan to help purchase a vehicle, many different types are available to you. What kind of loan will depend on many distinct factors like the brand of car you’re looking to buy, what the lender wants, and your needs as the purchaser. In this article, we will break down the kinds of auto loans out there so you can make an informed decision when the time comes. 

What Is An Auto Loan?

Simply put, an auto loan is where you obtain funds through a lender, and then use that cash to buy a vehicle. The loan is split into set payments over a specific period, and interest will accumulate on the borrowed money. Depending on how good your credit score is will determine if you can get a reduced interest rate (which will save you in the long run). Your score will also establish how much the loan will be and the needed down payment. 

Secured  

Typically, auto loans are of the secured variety. The vehicle is used as collateral for the loan and if you default on the payments, the lender can have the car repossessed. In that case, the lender will sell the car to someone else to compensate for their losses. This all falls under the umbrella of a lien, and the lienholder (the lender) is listed on the car’s title and has a claim on the car until the loan has been paid off. 

Unsecured 

This type of loan is not as popular. Since there is no collateral, the lender must rely on the borrower to repay the loan. This often includes bigger interest rates than the common secured loan option. 

Simple Interest 

For this loan, interest is determined on the “outstanding principal” (at the time of payment). If you took out a loan of twenty thousand dollars and whittled it down to ten thousand dollars, the interest will be calculated on the pending ten thousand. This kind of auto loan lets the borrower pay it off sooner, saving money in the process. 

Precomputed Interest

The interest for this is computed based on the length of the loan and then split into equivalent amounts to be paid every month. This option is stricter than the simple interest one because even if you paid off half of your loan, you would still have to pay the same amount of monthly interest. 

Direct Financing 

This is a good choice for customers who like flexibility. The lenders for this include credit unions, online finance businesses, and banks. They give loans to people who want to buy a car from a private seller or dealership. This type of auto loan lets the client get preapproved for a loan before they purchase a vehicle. 

Indirect Financing 

In this instance, a car dealership will act as the middleman and negotiate financing for the customer by getting a loan from a lender. The dealership will often add interest points onto the lender’s proposed interest rate since they are the go-between and want to make a little extra for their time. Captive lenders, which are finance companies in association with a particular auto manufacturer, can also provide indirect financing. On top of that, they will sometimes propose enticing incentives like rebates. 

In-House Financing 

Sometimes this type of auto loan is the only option for clients with less-than-stellar credit. In-house financing is a type of dealership that offers the customer the opportunity to buy a car, but also get a loan from them as well. It’s a “buy here, pay here” situation that allows the purchaser to pay the dealership directly. The downside to this is that interest rates can be much higher than other types of auto loans. 

Lease Buyouts 

This type of auto loan is where the client makes regular payments to the lender until they solely own the vehicle. 

Private Party

This kind of auto loan is for people who want to buy a car from a private seller instead of a dealership. When you acquire a loan like this you need to keep in mind a few things. Does the vehicle have an outstanding lien? Does the seller still pay off money on their loan? 

New And Used Auto Loans 

New cars cost more money than used ones. This applies to the loan amount and the vehicle payments as well. New auto loans are also a longer duration than used cars. Although newer cars usually have decreased interest rates partly because repossession isn’t as likely. If it does happen, lenders will have an easier time if they need to repossess the vehicle.  

The Choice Is Yours 

Regardless of what type of auto loan you go for, shopping for a vehicle is a huge undertaking. Make sure to do your research and go to a reputable dealershipwhen you are ready to buy. When you do ultimately purchase a car from a dealership, the dealer will usually store all the paperwork about the sale of the vehicle in a Deal Jacket. Deal Jackets are sturdy 9 by 12 inch envelopes used to hold all the pertinent paperwork on a vehicle’s sale process. If you operate a car dealership and are looking to purchase Deal Jackets, consider MBR Marketing at: https://mbrmarketing.com/dealer-supplies/deal-jackets.

There are many factors when it comes to what auto loan is right for you. They depend on the duration of the loan, credit score, penalties, fees, and interest rates. When purchasing a vehicle and looking for an auto loan, it’s important to figure out what your budget is. You need to be able to afford what’s being offered and make sure the terms work for you.