What Are the Different Types of Car Loans?
With the average price of a car climbing up to the $50,000 mark, it’s easy to say that buying a vehicle is one of the largest purchases you can make. Most people don’t have the money for a brand-new car sitting in their wallets.
If you’re one of these people you only have one choice. You have to take out a loan. There are different types of car loans available to you, depending on your credit score and source of income.
Most loans fall into the category of secured or unsecured. Check out this guide to learn about what these terms mean and more.
More often than not, auto loans fall into the secured category. What this means is that if you fall behind on your payments, the lender has the right to repossess the car.
Since these loans aren’t that risky for lenders, they come with reasonable interest rates and flexible payments. Of course, if you want the best possible interest rate, you’ll need to work on bettering your credit score.
Unsecured loans have no collateral behind them. Even if you can’t make your payments, the lender won’t come to take the vehicle back.
This makes unsecured loans a bit riskier for lenders than secured ones. The interest rate will reflect that.
If you can’t handle the payments, your credit score will take a huge hit. Depending on the situation, the lender may also be able to sue you for breach of contract.
If you’re interested in pursuing an unsecured loan, check out this info!
Commercial Hire Loan
When you get a commercial hire loan, the financier will pay for the vehicle and rent it out to you for a set period of time. You’ll be able to drive the car, but it’s not technically yours.
You won’t own the vehicle until you’ve submitted your final payment and the contract is closed.
The best thing about commercial hire loans is the flexible contract lengths. It can range anywhere from 12 to 60 months. That makes it easier for the lender to modify the loan based on your budget.
If you’re using the vehicle for work purposes, you can deduct a portion of your payments from your taxes. The repayment and interest rates for commercial hire loans are fixed. That means you’ll never have to worry about your payments increasing on you.
Simple Interest Loan
If you choose to go with a simple interest loan, most of your monthly payments will go toward your interest. As you chip off the interest, more and more of your payments will begin to take care of the principal amount that you owe.
While you’ll have a fixed payment that you have to give the lender every month, you can put forth more. This will allow you to pay off the vehicle faster with no penalty.
A precomputed loan occurs when a lender calculates all the financial charges for a loan upfront and adds it to your principal balance. They’ll divide the amount by the term of the loan to come up with the total of your monthly payments.
Precomputed loans aren’t too flexible, but if you happen to pay them off early, you may be entitled to a refund. It’s important to note that the amount you’ll get back is often lower than what you would have saved by pursuing one of the other types of auto loans on this list.
Direct Financing Loans
If you want, you can go directly to a bank or credit union to apply for an auto loan. If approved, the lender will provide you with the money you need to purchase a new or used vehicle.
You’ll be responsible for paying back the direct financing loan over a set number of months. Most lenders have a grace period if you need to pay late, but you’ll face a penalty.
Indirect Financing Loans
Getting an indirect financing loan involves going through a car dealership. You will need to have a stable income and a decent credit score for the dealer to offer you financing.
If the dealership extends an offer and you take it, you’ll sign a contract that they’ll hand over to a third party. The bank or credit union that takes on the loan will write the dealership a check for the vehicle, and you’ll pay them back.
If you don’t have the best credit, it might be a bit difficult for you to get an auto loan. That’s what subprime loans are for. They’re made for those with a credit score of 600 and below.
While you may qualify with that kind of score, you will get a better interest rate if you apply after you take the time to improve it.
Do you own a car and need quick cash to put a downpayment on another one? You should consider a title loan.
This loan will allow you to borrow against the equity built up on your vehicle. The catch is that you only have a handful of days to pay it back.
Types of Car Loans for You to Pursue
Whether you’re buying new or used, getting your hands on a vehicle can be expensive. Most people can’t complete their purchase without taking out a loan.
As you can see, there are many different types of car loans to choose from. Start shopping around today to find one that matches your credit score and budget.
For tips that will help you save up for your next vehicle, visit the Finance section of our blog.