Types Of Auto Loans

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Types Of Auto Loans

When you’re purchasing a vehicle, you will have to make a choice from the different types of auto loans that are available. Knowing what these loans consist of can further help you decide which one is right for you.

What Is An Auto Loan

An auto loan allows you to borrow money from a lender to purchase a car. You will repay it in the term that you’ve picked and agreed upon. Your interest will vary depending on the lender you choose and your credit score. Your credit score will also determine the amount you will be allowed to borrow, so keep this in mind when shopping for a new vehicle.

If you’re unsure about what your credit score is, you can always use a Free Credit Report tool online.

Different Types Of Auto Loans

As we mentioned before, there are quite a few types of auto loans. Making the decision can be difficult if you know nothing about them.

New And Used Auto Loan

When purchasing a new or used vehicle you can pay by cash, lease or by getting a loan. This is the most basic loan option considering you can get it from different lenders like banks, credit unions and from online lenders. Again, your credit score is a big determining factor for what kind of loan you can get and from who.

Secured Auto Loan

Most loans are considered a secure loan, depending on the lender. A secured loan grants the lender to repossess the vehicle if a borrower decided to stop making payments and communicating. These types of loans tend to have lower interest rates since they have the ability to take back the vehicle if you aren’t complying with the terms of the contract.

Unsecured Auto Loan

There are not many lenders that will use an unsecured loan due to the liability and risk of using them. If a borrower were to stop making payments and refusing to contact the lender, the car can not be repossessed by the lender like it could be in a secure loan. This is the reason that interest rates for an unsecured loan are much higher than any other type.

car loans

Direct Auto Loan Financing

This is the most common form of financing because the customer talks directly with the lender. This way, you can shop around on your own and not deal with a third party. If approved, the lender will either mail a check to the dealership to pay for the car or hand it directly to you.

Indirect Auto Loan Financing

An indirect auto loan is received when you go through a dealership salesman or finance manager. This is used when you don’t have an auto loan set up prior to purchasing a vehicle. You apply for this type of loan on site, with multiple lenders on some occasions. The finance manager is the one who will handle all contact with the lender if you go with this option.

Private Party Loans

Private party loans are for when you’re buying a vehicle off of a private seller rather than a dealership. Be sure to consider that a private seller may still owe money or have a lien on the vehicle. You can apply for these types of loan at a normal financial institution or bank.

Lease Buyout

At the end of your lease contract you usually have the option to do a lease buyout. This lets you make payments to the lender so you can own the vehicle fully if you decide you want to keep it.

Auto Refinancing Loan

Refinancing your loan is a great way to lower the payments and change the length of your term. If your credit score has increased since you’ve purchased a vehicle, refinancing might save you money in the long run. If you’re unsure about refinancing, you can always use an auto refinance calculator to help determine if it is a good option for you.

types of loans

How To Apply For An Auto Loan

First, check your credit score. Your credit score is the determining factor when it comes to applying for a loan. It is what determines the interest rate and the amount you can borrow from a lender. If your score is in the lower range and you don’t need a car immediately, take some time to build up your credit so you can get the best rates.

Next, apply for multiple loans. You want to look at quotes from different lenders so you make sure you’re getting the best rate, don’t settle! You can apply to any national or local banks, online lenders or you can go through the finance manager at your local dealership.

Then, get pre-approved by your lender. Getting pre-approved gives you a step up in the dealership and it gives you more negotiating power. It can help you with planning and budgeting on your purchase and shows the dealer that you’re a serious buyer.

Now, make a decision on a car. Some lenders have restrictions when it comes to the vehicle, dealership and the amount of time it takes you to pick a vehicle. Most lenders have a 30 day range that you must use your loan in. They’ll allow you to extend your loan if you’ve run out of time, but don’t forget to contact them or you’ll have to reapply.

Finally, choose your loan. Inform your lender that you’ve made a decision on a vehicle, they will either mail the dealership a check for the vehicle or hand it to you to take in to them yourself. After you’re done signing all of your paperwork, you’ll be set to take your new car home! Always make sure you are continuing to make your loan payments on time, otherwise they can repossess your vehicle if you get behind on payments.

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