When thinking about purchasing a car, you may also have to consider how you will finance this new vehicle. You may not be able to pay in full, depending on your financial obligations. Fortunately, there are myriad types of car loans that you can apply for that may match your budget.
Funding your next auto purchase with a loan requires understanding the different car loans available. Knowing the distinctions among the car loan types can give you the confidence to choose the best option for you. Plus, you will have a better idea of the type of commitment you will have to make regarding repayment.
Keep reading to learn more about the auto financing process through the various car loan options out there. Let’s help you make an informed decision to get the car of your dreams.
The Basics of Auto Financing
Suppose you decide what car you want to buy. Now you need to determine how you’re going to pay for it. You can make a one-time payment or gradually pay over time through a loan or lease.
Financing With an Auto Loan
When using the latter option to purchase a car, you may be granted time to pay off the total amount, but you will be paying more for the vehicle than if you paid in full. That’s because auto financing includes the cost of credit (interest and loan fees) and the cost of the car.
To make sure you understand what exactly you’ll be paying for when acquiring a loan to finance a car, here are the factors involved:
- The loan amount (the total amount you’re borrowing)
- The loan interest rate or annual percentage rate (APR)
- The loan term (total amount of time for loan repayment)
You can make the car purchase with an auto loan once you agree to a fixed monthly payment amount, defined by the APR and loan term. Keep in mind that interest rates tend to be higher if you’re financing a used car rather than a new one. Therefore, it’s best to research the best car loan rates before committing.
Financing With a Car Lease
An alternative option is to lease your car. Leasing a vehicle indicates you only pay a portion of the total price. It’s as if you’re paying to use the car but not to own the vehicle outright.
Car leases have their own set of payment structures and fees. You may pay less than purchasing the vehicle in full, but you gain no equity, which would have allowed you to trade in or sell the car when you no longer want it.
After the lease period ends, you are given a choice to purchase the car, but that would entail paying more than the vehicle’s original price.
What's the Best Type of Car Loan?
The best car loan options are the ones that save you the most money. In addition to looking for lower interest rates, you should search for loans with an easy application process and financing options for both new and used cars.
You should also consider a loan with flexible repayment terms, including no prepayment penalty. That way, you can save money if you want to refinance your car loan or pay it off early.
Refinancing a car loan means changing your current loan to a new loan with reduced monthly payments. It may not be the best option for everyone, so it would help to research refinancing opportunities to see if it’s right for you.
The Different Types of Car Loans
If you’ve never financed a car through a loan, you may be wondering why there are various car loan types. The different types of loans have to do with the type of lender, vehicle, and borrower’s needs. These variables significantly affect the loan process and terms, which can be further explained below.
New Car Loan
As the name indicates, this loan is for purchasing a new car. Whether you go to a bank, a credit union, a finance company, or an online lender, you will need to provide your credit history and application to be approved for this loan.
If approved, the lender usually informs you of the loan terms, including the monthly car loan payments with interest and fees. You should be able to get pre-approval for the loan before you buy your new car, and then you can complete the loan process at the time of the purchase.
Used Car Loan
A used car loan is similar to a new car loan, except you would use it to buy a pre-owned car. Another difference is you may have to pay a higher interest rate. That’s because used vehicles aren’t deemed as valuable as new cars.
Secured Car Loan
You can apply for a secured loan to purchase either a new or used car. Obtaining a secured loan means you will have to use the vehicle you’re buying as collateral for the debt. The lender places a lien on your car, which affords them ownership rights to the vehicle until you repay the total loan.
So if you stop making payments on a secured loan, your car can be repossessed by the lender and resold to recover their losses. With that in mind, you may not want to get a used-car secured loan. The interest rates are possibly the least favorable, and you risk losing your car if you cannot meet your obligation to the lender.
Unsecured Car Loan
This type of financing may be the least common, but it offers a loan option where you don’t have to use your car as collateral. Instead, you may end up paying a higher interest rate to compensate for the increased risk.
In-House Financing
In-house financing takes place at car dealerships that sell vehicles and provide loans; not all dealerships offer auto financing. Therefore, you will need to research the ones that have this option if it’s what you prefer.
Dealerships with in-house financing typically work with customers who have bad credit. Payments are made to the dealership, and interest rates tend to be higher than other loan options.
Direct Financing
Direct financing enables you to get preapproved before even shopping for a car. And since you’re seeking funding through lenders such as banks, credit unions, or online finance companies, it’s an easier way to search for the best loan deal.
Indirect Financing
With this type of auto loan, you, the car dealership, and a prospective lender work together to acquire the funding you need for your purchase. In other words, a dealership acts as a middle person to help find you the best deal through their financial institution network.
That finance company then determines your loan terms, with the dealership’s slight increase in the interest for working on your behalf, and you make your payments directly to the lender.
Private Party Car Loan
A private party car loan can be arranged through a traditional lender, such as a bank or credit union. And the vehicle you’re purchasing would be used to secure the loan.
This option works well if you plan to purchase a vehicle from an individual and not a business. However, before making any commitments, it would be best to find out if the seller has an outstanding car loan balance, or lien, on the car.
Lease Buyout Loan
This financing option works for those who would prefer to rent or lease a car. Typically using a leasing company, you would be able to lease the vehicle for a specific amount of time, such as 24, 36, 48, 60, or 72 months. In some cases, it can be even longer.
You are, then, given a chance to buy the vehicle outright as your lease term comes to an end. To take advantage of this opportunity, you must first find out if you qualify for a lease buyout loan.
This financial assistance can help cover your car’s end-of-lease value (residual value), any fees, and final lease payments, which you’re expected to pay in full to gain ownership of the vehicle.
Title Car Loan
Title car loans allow you to borrow against the equity of a vehicle you already own. Selecting this auto loan option would entail the lender placing a lien on your car and getting ownership of the car’s title. Additionally, defaulting on your loan payments could lead to repossession of your vehicle.
How to Find the Right Car Loan
Finding the right auto loan is equally as important as finding the right car. To get the best auto loan rate, you should shop around, get quotes from different lenders, and compare rates. You’ll also need to maintain good credit to qualify for a low-interest rate.
If you need help reviewing the types of car loans that work best for you, visit our site and check out our network of lenders. We can help you avoid overspending on your new or pre-owned car.