Estimates show that auto loans finance about two-thirds of vehicle purchases. Auto finance lenders like banks, credit unions, and car dealerships offer different types of loans that help you find your dream ride. While so many options are available, it is important that buyers weigh their choices carefully and opt for a vehicle loan that suits their needs. Some of the different types of loans offered by an auto finance lender are discussed herein.
1. Secured loans
They are the most common type of loans offered by an auto finance lender. Here, you give the car or another vehicle as collateral for the loan. If the buyer defaults on paying back, the lender repossesses the vehicle and sells it to recuperate losses. While some auto finance lenders put a lien on the vehicle purchased, others include the lien for a different vehicle or even a house owned by the buyer. In the simplest of terms, secured auto loans are like a mortgage for a vehicle.
2. Unsecured loans
Exclusively offered to individuals with a high credit rate, unsecured loans do not require any form of collateral. The auto finance lender has no right to repossess any property or vehicle in case you default on the loan, but they can take legal actions through other means. Since there is a high risk involved for the bank or dealership to give out unsecured loans, the interest rates for these are higher.
3. Simple interest loans
Simple interest loans calculate interest on the basis of the outstanding principal amount. So, by paying off the loan early, you can avoid giving more interest to the principle that’s already cleared. You can do this by making higher monthly payments or bi-weekly payments. If the lender offers a simple interest loan, it might be a good way to reap some financial benefits.
4. Precomputed interest loans
When it comes to precomputed loans, the interest is calculated on the principal throughout the loan. This interest amount is further divided by the number of months and remains the same throughout the loan period. Since the interest amount does not waver, you do not save money by paying off the loan earlier.
5. Lease buyout loans
Sometimes, an auto finance lender will give out loans to vehicle owners to enable them to buy out their lease, at the end of the vehicle’s lease term. These are lease buyout loans. Since you are already well acquainted with the vehicle’s accident history, maintenance, etc. it makes more sense to buy it rather than shop around for a new ride. Also, taking out a lease buyout loan and purchasing your leased vehicle is beneficial as you can avoid penalty fees for damage or driving beyond the mileage limit. However, the downside of this loan is that your monthly payments increase significantly.
6. Equity loans
They are short-term loans offered by an auto finance lender. They are not valid if there is already a lien on the vehicle. The value you can borrow while taking an equity loan varies with different auto finance lenders. As vehicles depreciate faster, some lenders might hesitate to loan out a larger amount.
When researching auto finance lenders and the loans they offer, remember that the terms of negotiation depending on several factors, such as interest rate, credit score, APR, and penalties for delayed payments. It is necessary to seek out an auto finance lender that offers a loan you can afford.