Types of Auto Loans for your car purchase

What is an Auto Loan?

Do you need a vehicle but have no immediate finances? You may, at times, find yourself in this situation, yet you lack the finances. Purchasing a car is a costly affair; therefore, you need to make the best decision by getting an affordable loan.

An auto loan is a car loan that is secured. Being secured implies that the vehicle you buy with the borrowed amount serves as the collateral for the loan. In this case, you may not need any other security to obtain the loan.

There are several types of loans that you can source to finance the cars that you may want.

Types of Auto Loans

Secured Car Loans

The secured loan is the most common loan among the lenders. In this loan type, the vehicle you are financing serves as the collateral or security for the finances loaned. In case of lack of payment, the lender may repossess any of the cars under this agreement.

This loan comes with lower interest rates and the right to repossess the vehicle is void once you clear the loan.

Unsecured Car Loans

This type of car loan does not consider the vehicle you are purchasing as collateral. It means that in the event you stop paying the borrowed amount, the lender cannot repossess the car or cars. Due to the risk factors involved, the lenders charge high-interest rates and offer loans depending on positive credit scores.

Simple Interest Car Loans

This type of car loan is generally much better, especially for individuals who pay off their loans much faster. The interest charged in this regard is not precomputed. It is only calculated based on the remaining balance.

This factor means that if you pay off the loan much faster, you will end up paying less interest.

Precomputed Car Loans

These loans are less flexible than simple interest loans. The method of payments in this regard is predetermined. The amounts that you pay towards clearing the loan contains an interest and principal amount that is preassigned.

If you make faster payments of more significant amounts, the interest is not affected since the total is precomputed. This loan type is suitable if you have fixed predetermined earnings.

Direct Financing

In direct financing, lenders offer you loans to buy vehicles from a private party or dealership. If you obtain this kind of loan, you get preapproval before going to shop for the car. It is advantageous since it is easy to obtain.

Indirect Financing

Indirect financing has the dealership serving as the middleman. The dealer obtains a loan from a lender on behalf of the customer. The dealer may add an amount to the interest to make a profit from the deal.


• They are easy to obtain.
• Most of them have lower interest rates.
• When you buy a vehicle through the loan, the insurance will pay for damages based on the current market value of the car.
• Taking a car loan makes you eligible for refinancing options.
• Some loans enable you to enjoy early payoff advantages.
• The loans eventually lead to you owning a car as compared to cheaper options like leasing.

This list provides the various types of car loans that you can source. We hope this information helps you make the best decision by taking a car loan that is most convenient for you.