Understanding Different Types of Car Loans: Choosing the Right Option for You
Knowing the ins and outs of different car loan options can give you confidence in the car-financing process.
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Do you intend to fund your next car purchase with a car loan? If so, then you'll want to understand the different types of car loans available. Seeing the differences between each car loan type can help you determine which may be the best option for you. It can also clarify the kind of commitment you'll need to make when selecting a specific type of financing.
9 Types of Car Loans to Consider
If this is your first time in the market for a car loan, you may be surprised at how many options there are. Car loan types differ by:
- Where you can obtain them
- What type of vehicle purchase they can be used for
- Whether the vehicle secures the loan
1. New Car Loan
When you buy a new car, you can buy it with cash, a lease, or a car loan. Lenders such as banks, credit unions, online lenders, and finance companies will look at your credit history and credit application to decide whether to approve or deny you for the loan. If approved, they'll provide you with loan terms, including a monthly payment with interest and fees that you need to pay back with consistency.
You can get pre-approved or pre-qualified before you purchase a vehicle, and then finalize the loan at the time of purchase.
2. Used Car Loan
A used car loan is actually just like a new car loan, except the purchase is for a used car. Note that when you purchase a used car, the loan terms may not be as favorable because the vehicle itself is not as valuable. This is particularly important for secured loans, which are next on the list.
3. Secured Car Loan
New or used car loans can be secured or unsecured. A car loan is secured if the car itself is used as collateral for the loan. This means that the lender can repossess the car to make the lender whole in case of loan default. For used car secured loans, make sure you can afford the potentially less favorable interest rates, as the lender could repossess your vehicle if you can't.
4. Unsecured Car Loan
Though they're not a common type of loan, there are also unsecured car loans, where the vehicle is not used as collateral for the loan. When there is no collateral for a loan, the lender compensates for the increased risk by offering a higher loan interest rate than a secured loan would include.
5. In-House Financing
With in-house financing, the dealership you purchase the vehicle from actually offers the car loan to you instead of a financial institution. Not all dealerships have this option, so if you're interested in this type of loan, then you'll need to research in-house financing car lots.
6. Indirect Financing
Indirect financing involves you, the lender, and a third party who acts as an intermediary in the process. For example, a dealership might gather your credit information and then use it to shop around for a loan on your behalf from their network of financial institutions. The bank would then purchase the dealership-originated financing from the dealership, and you would make payments to the bank.
7. Private Party Car Loan
If you're buying a used car from a private seller, you could look into a private party car loan to pay for it. You can apply for these types of loans from traditional lenders, such as banks and credit unions, and the vehicle will typically be used to secure the loan.
8. Lease Buyout Loan
Under normal lease terms, you're basically renting the vehicle from a leasing company for a period of time. Typical lease terms can be 24, 36, 48, 60, or 72 months in length, and some can be even longer.
Toward the end—or at the end—of your lease term, you may decide to buy the car outright. This is where a lease buyout loan can come into play. A lease buyout loan finances your car's end-of-lease value (also known as the car's residual value) plus any fees and final lease payments which you'll need to pay to own the vehicle.
9. Title Car Loan
A title car loan allows you to take out a loan against the equity of an owned vehicle. In other words, you can only take this loan out once you own the car outright. The lender then places a lien on the vehicle and takes ownership of the title, which means they can repossess the car if you default on payments.
Finding the Right Option for You
While you have many types of car loans from which to choose, some of them can only be used for certain purchase types, such as from a private seller or for a new vehicle. With this knowledge in mind, you should be in a more informed position as you make your next vehicle purchase.
