Auto loans, also called car loans, are secured or unsecured loans (mostly secured). When you get a secured auto loan, the car you buy serves as collateral for the loan. The purchase price and interest are split into small monthly payments, making it easier to pay the loan.
Recent loan statistics indicate that Americans owe accumulated auto loans of nearly $ 1.4 trillion, and the amount may go higher in the future. With prices of new cars going over $40,000 in December 2020, auto loans may be the best option for you.
Let’s have a look at the auto loan types available.
Technically, all auto loans fall into two categories: short-term or long-term. Depending on the lender, a short-term loan may have a repayment period of 12 to 36 months, while a long-term one can be repaid for more than 36 months.
Short-term auto loans have high monthly payments, but their interest is low. On the other hand, long-term loans have low monthly payment amounts but higher interest rates. Long-term loans are relatively easier to manage than short-term loans, but the total amount paid is more.
Auto loans can also be secured or unsecured. With secured loans, the lender uses the car or another asset as collateral and has the legal right to repossess the asset when the borrower defaults on payments. These loans usually have lower interest rates as they are less risky for lenders.
Unsecured loans have no security, and the lender will use other legal means to go after a delinquent borrower. The interest for unsecured loans is higher due to their increased risk.
All auto loans accrue interest, but there are different ways lenders calculate this interest. Simple interest loans accrue interest on preset periods, such as daily. Every period’s interest is based on the principal outstanding amount. A borrower can reduce the interest due by opting for higher monthly payments or paying the whole loan before the repayment period ends.
Conversely, precomputed interest auto loans have a fixed payment amount with pre-calculated principal and interest. The charges are unchangeable, and the borrower follows the precomputed payment schedule until the loan maturity period. Higher payments save the borrower no money.
Direct and indirect auto loans depend on the number of parties involved. For direct auto loans, the borrower deals directly with the lender. For indirect loans, the dealership or another third party acts as the go-between for the lender and borrower. Some lenders accept both financing options. Of course, indirect auto loans may have higher interest due to increased APR (Annual Percentage Rate) quoted by third parties.
These are auto loans available to active-duty service members, their spouses, and certain dependents. This loan category is protected by the Military Lending Act and the Servicemembers Civil Relief Act (SCRA).
These loans are dealership in-house financing options for people who don’t qualify for traditional loans from lenders like banks. The auto financing is given by the car dealer and usually at rip-off annual percentage rates.
These auto loans are less common and mainly involve using the equity in your car to get loans for purposes like paying bills. They include:
Title auto loans are available to car owners and use a vehicle’s title as collateral. They fall under secured loans, you borrow against the value of your car. These loans have no borrowing limit and are very flexible.
As long as your vehicle is in good condition, you can get a loan. You can access title loans online or at dealerships. With online loans, you apply online and get the funds delivered to your account.
These auto loans apply to lessees who wish to keep the cars after the lease term expires. The borrower secures a lease buyout loan, then repays the lender over a set period as per the loan agreement.
Auto loan types vary, and choosing the best one may be overwhelming. It’s always a good idea to shop around for the most affordable loan option–with favorable terms–as delinquency is very costly.