Auto Loan Guide | Tracking

Buying a car is usually a big investment, so big that most people have to take out a car loan. Although not as diverse as the cars that are financed, different types of auto loans fit different consumer needs. Understanding these loans can help you find the financing option that works for you. Most loans available for buying a car can be broadly categorized as follows:

secured and unsecured loans

While researching the various types of auto loans, you may come across statements that the loan is either secured or unsecured.

secured loan

Virtually all auto loans are collateralized. In other words, it is secured by a lien on the underlying asset, the vehicle itself. A lien is a legal claim that allows the lender to get your car back in the event of a late payment. The lien is released when the loan is fully repaid.

unsecured loan

Unsecured loans do not include collateral or collateral to the lender. Mainstream consumer lenders may offer unsecured loans that can be used to purchase a car (or anything else), but these loans tend to have higher interest rates. Another alternative to these unsecured loans for buying a car is taking out a loan from a friend or family member. However, in the event of nonpayment, the lender may take legal action to obtain the money owed or to obtain the vehicle.

Simple interest and precalculated interest

Speaking of interest rates, most auto loans accrue interest on a simple interest basis rather than what is known as a “pre-calculated” basis.

Simple interest car loan

Simple interest auto loans accrue interest on the outstanding balance on a daily basis. Making large or additional payments can accelerate the reduction of outstanding principal, expedite final loan repayments, and reduce total interest expense.

pre-calculated interest auto loan

For auto loans with pre-calculated interest, the interest accrual and payments are fixed, and even if you make a larger or additional payment, or pay early, your payments will decrease. or affect the total unpaid interest. Pre-calculated car loans are rare in the market.

Direct Loans vs. Indirect Loans

Another way to differentiate car loans is based on the loan originator. This can be broadly divided into direct and indirect financing.

direct loan

Direct loans are made directly from the lender. Bank, credit unions or other financial institutions.Buyers can secure loans or pre-qualify before starting car shopping It helps them have a clearer picture of what they can qualify for.

indirect finance

Indirect financing usually refers to dealers arranging financing on your behalf. Dealers act as initial creditors and work with buyers to establish acceptable interest rates, repayment terms, and other terms. The distributor can then sell the sales and credit agreement to a financial institution such as a bank.

Other types of car loans

In addition to the types of auto loans mentioned above, there are other specialty loans that are useful to know about.

title loan

A title loan utilizes your current vehicle stock as collateral for the loan. Vehicle equity is the difference between the value of the car and the money you owe. As with any secured loan, the title lender will place a mortgage on the car so that if the terms of the loan are not met, the car can be repossessed and sold to cover the amount owed. Title loans usually come with very high interest rates and short repayment terms.

Another Consideration: Lease Buyout

At the end of the lease contract, you have the option to purchase the vehicle for a specified price, usually called the residual value. If you need financing for this, you may be able to take out a loan for this purpose. If you decide to purchase the leased vehicle before the end of the lease term, check the lease agreement to see if there will be any fees or charges to do so, and to meet the pre-negotiated residual value. Please check if it affects you. .

In summary

When it comes to auto loans, it’s generally helpful to consider your options carefully before prioritizing one type of loan over another. Or you may decide that a lease is better than a car loan. Understanding your options can help you decide which type of loan is best for you.

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