What Are Auto Loans and Types of Auto loans?

What Are Auto Loans and Types of Auto loans?

Purchasing used cars from different buyers is a common practice in many parts of the world. With the increasing economy, this trend is gaining immense popularity. Almost 60% of the car owners have bought used cars.

Buyers take auto loans to secure their car purchase. This loan is specially structured to provide you with installment loans that can be used to purchase a motor vehicle. If you are new to this term “auto loan”, you should read on to explore everything that you need to know.


What is an Auto Loan?

Auto Loan is a loan that a person takes when he/she intends to buy a motor vehicle. There is no restriction when one plans to get an auto loan. These loans are secured by the cars or the motorcycle that is being purchased.

Auto Loan comes in a varied range and is of different types. These types are structured according to the requirement of the lender, the buyer, and the seller.


Some Common Types of Auto Loan

There are so many types of auto loans that you can choose as per your preference and convenience. The list goes on when it comes to explaining the types of auto loans. However, the categories shared below are the most common ones.


1: Secured Auto Loans

Imagine lending a loan to someone who does not pay back to you at the right time. This could be regarded as a fraud. To avoid such fraudulent activities, secured auto loans are structured. The main objective of secured auto loans is to make sure that the payment lend is paid back in times.

If a person fails to make the due payments, the lender has the authority to possess the motor vehicle and sell it to someone else to compensate for the loss. Most of the auto loans made are secured loans. This type of auto loan can save your money and can provide you with a safe environment where you are not afraid of losses.

Now, you must be wondering how to keep this deal secured and avoid any fraud. Well, there is a legal agreement that the two persons have to make sure that the left payment is made on time.


2: Unsecured Auto Loan

Opposite to a secured auto loan is an unsecured auto loan. In this type of auto loan, the lender has to rely on the words of the borrower. If a person does not repay the borrowed money, the lender has no power the possess the vehicle or take back the money in any form.

This form of auto loan is very less common among the people as it leaves a higher risk of threats and risks. Because of the uncertainty of borrower’s repayment, unsecured auto loans usually have higher interest rates.

Also read: What Is An Installment Loan? [A Beginner’s Guide]


3: Simple Interest Auto Loan

If you are a borrower and are planning to take an auto loan then you should go for a simple interest auto loan. Simple Interest Auto Loans will leave the buyer with the choice of repayment. He gets a flexible environment when it comes to making payments.

A borrower can limit the extra expenses if he pays on time. A borrower is required to pay after every month. However, if the borrower speeds up the payment, he will have to deal with lower interest rates.

A simple interest loan is the best option for a person who wants to reduce the overall payment costs. This type of auto loan would not cost you much and will save you from lessening your savings.


4: Pre-Computed Auto Loan

A pre-computed auto loan is the type of loan in which you can make scheduled payments that are determined beforehand. Everything is scheduled and an assigned interest rate or principal. Accelerating the payments would not affect the total interest rate.

This form of auto loan is best when you are uncertain about your future financial picture. If you are not sure about your future budget if it will increase or drop off then selecting a type of auto loan where you will have to make scheduled payments is the best option for you.


5: Private Party Loans

If you want to avoid getting into a dealership involving a group of people, it is a better option to choose a private party loan. This type of auto loan can be taken if you are dealing with an individual seller.


6: Direct Financing

This type of auto loan is structured when you want to get in association with the banks, creditors, or finance companies. Online Finance companies would provide you with the loan or money if you want to purchase from an individual or a dealer.

Direct Financing Auto Loan is a much secure and easy way to get loans. Once the deal has been made, the borrower will have to pay back the money monthly or annually.


6: Indirect Financing

This type of loan involves third-party participation. In indirect financing auto loans, the borrower is paid through a person who gets in touch with the lender. In this type of financing, the third party man can make money or commission for getting involved.

There are so many financing companies that are involved with a captive lender and work for the cause of connecting captive lenders with borrowers. However, this type of auto loan is not regarded as a better option as compared to direct financing.

Also read: What Influences Auto Insurance Costs and How?


The Final Verdict

It is quite evident that each type of auto loan is different from others. There are some positive aspects to consider as well as some negative ones in each form of auto loan. Making the right choice is what you should look for.

You can make the right option if you take the auto loan that is according to your budget and the car you are buying. It is a better option to avoid taking auto loans which you would not be able to pay afterward. We hope that you will have a good experience in choosing the best auto loan for you.