Most people need cash to buy a vehicle outright when purchasing a car. Car loans are a popular option for financing the purchase of a vehicle. However, with so many different types of car loans available, it can take time to know which is best for your needs. These are a few of the most typical vehicle loan types:
Secured Auto Loans
Secured auto loans are the most popular type of car loan. These loans are secured by the vehicle you are purchasing. If the loan is not returned, the lender may seize and sell the car to compensate for their losses. Secured auto loans typically have a lower interest rate than unsecured loans because the lender has collateral as a hypothecation of a vehicle to secure the loan.
One can obtain secured auto loans from Banks, credit unions, and other financial institutions. The loan amount and interest rate you qualify for will depend on your credit score, income, and the vehicle’s value.
Unsecured Auto Loans
Unsecured auto loans are not secured by collateral, which means the lender takes on more risk. As a result, unsecured auto loans generally have higher interest rates than secured loans. If you don’t pay the loan, The lender is unable to repossess the vehicle in order to collect its losses.
These loans are often used for purchasing used cars or for borrowers with lower credit scores who cannot qualify for a secured auto loan.
New Car Loans
New car loans are designed specifically for purchasing brand-new cars. Because new cars generally have higher resale value and are less likely to require significant repairs shortly, lenders are more willing to offer lower interest rates on new car loans.
Used Car Loans
Used car loans are designed for purchasing used cars. Because used cars have a lower lesser value and are more likely to require repairs, lenders generally charge higher interest rates on used car loans. Some lenders also have age or mileage restrictions on the cars they will finance.
Refinancing of Takeover Car Loans
Refinance auto loans are used to refinance an existing car loan. You can reduce your interest rate, increase/decrease the length of the loan period, and reduce monthly payments by refinancing or takeover your car loan with a lender has a lower rate of interest. Refinancing can be a good option if your credit score has improved since you obtained your original loan.
Refinance auto loans can be obtained through banks, credit unions, and other financial institutions. The loan amount and interest rate you qualify for will depend on your credit score, income, and the vehicle’s value.
Lease Buyout Loans
Lease buyout loans are used to purchase a vehicle at the end of a lease. If you decide to buy the car, you can obtain a lease buyout loan to finance the purchase. Lease buyout loans typically have lower interest rates than other types of auto loans because the lender knows the vehicle’s value.
Banks, credit unions, and other financial institutions can obtain lease buyout loans. The loan amount and interest rate you qualify for will depend on your credit score, income, and the vehicle’s value.
Dealer Financing
Dealer financing is a car loan offered directly by the dealership where you purchase your car. Dealerships work with a network of lenders to offer to finance to their customers. This type of financing can be convenient because you can apply for a loan and purchase a car in one place. However, dealer financing may only sometimes offer the best interest rates, and you may need more negotiating power with the dealership.
Balloon Loans
Balloon loans are a type of auto loan where you make smaller monthly payments for a fixed period and then make a larger payment at the end of the loan term to pay off the remaining balance. Balloon loans can be helpful for borrowers who want lower monthly payments but can make a larger payment at the closure of the loan term.
Bad Credit Car Loans
Bad credit car loans are designed for borrowers with poor credit or no credit history. These loans generally have higher interest rates than other car loans, but they can be an excellent choice for borrowers who need to purchase a car but need help qualifying for different types of financing.
Pre-Approved Auto Loans
Pre-approved auto loans are loans you can obtain before you even begin car shopping. Pre-approval can help you determine how much you can afford to spend on a vehicle and give you an advantage when negotiating with dealerships.
Banks, credit unions, and other financial institutions can obtain pre-approved auto loans. The loan amount and interest rate you qualify for will depend on your credit score, income, and the vehicle’s value.
Hire Purchase
Hire Purchase (HP) Car Loan A hire purchase (HP) car loan is a type of loan where the borrower pays a deposit and then makes monthly payments for a set period. At the closure of the loan term, the borrower owns the car.
The advantage of an HP car loan is that the borrower owns the car at the end of the loan term, and its usage has no restrictions. However, the downside is that the monthly payments are typically higher than other types of car loans since the borrower is paying off the total cost of the car.
Personal Contract Purchase (PCP) Car Loan
A personal contract purchase (PCP) car loan is a kind of loan where the borrower pays a deposit and then makes monthly payments for a set period. At the closure of the loan term, the borrower can pay a lump sum to buy the car, return it, or trade it in for a new one.
The advantage of a PCP car loan is that it allows the borrower to have lower monthly payments and the flexibility to choose what to do with the car at the end of the loan term. However, the downside is that the borrower only owns the car once the final payment is made, and there may be restrictions on the car’s usage during the loan term.
Novated Leases
Novated leases are a type of car financing where the borrower’s employer pays for the vehicle on their behalf. The borrower and employer enter into a “Novation Agreement” where the employer is responsible for the car loan repayments. This type of loan can benefit those who use their vehicle for work purposes, as the refunds are made using pre-tax rupees, resulting in tax savings.