The Ultimate Guide to the Different Types of Auto Loans

Americans buy a lot of cars each year, with around 41 million used cars selling in 2021 alone. That’s to say nothing of the approximately 15 million new cars sold in 2021.

Of course, buying cars isn’t quite the same as what people remember from the olden days of five or ten years ago. Used cars once represented a cheap alternative to new vehicles. As pandemic-related problems with labor and chip availability drove down new car production, used car prices rose steadily.

These days, you typically need auto loans for both. Of course, there are different types of auto loans out there. Keep reading for a breakdown of the different types of loans that can help you finance your next vehicle purchase.

Secured Loans

Secured vehicle loans are by far the most common kind of auto loan issued for vehicle purchases. With a typical secured loan, the borrower puts up an asset that can serve as collateral in case of default on the loan.

In most cases, the vehicle itself serves as the collateral. The lender secures the vehicle with a lien. As long as the lien exists, you can’t transfer the title.

While one could theoretically put up other kinds of assets as collateral for the loan, such as real estate, it’s not a common practice with auto loans.

In the event that you don’t make the necessary payments on the loan, the lender repossesses the vehicle. The lender can sell off the car or truck to pay off any balance left on the loan.

You may also run into balloon loans as an option for a car loan. Balloon loans let you pay smaller monthly payments.

Where it gets tricky is that you must make one large payment as the last payment to close out the loan.

Payments

The payments on auto loans can happen under a few different arrangements. Your average car loan will divide up the payments across the length of the loan. So, if you borrow $15,000 including the interest with a five-year loan, you’ll pay out around $250 a month for sixty months.

The catch is in how the loan organizes the interest. With some, you pay an equal amount of interest each month. That means that paying off the loan early will mean paying the full amount of principal and interest.

Other loans frontload the interest payments, meaning you primarily pay off interest for the first few years of the loan. However, with these loans, additional payments will often pay down the principal of the loan. That lets you pay off the loan early and reduce the total interest you pay.

Unsecured Loans

The other and less common option is an unsecured loan, which is typically a personal loan. Most people only look for these kinds of loans when they can get a traditional car loan.

For example, many lenders will only finance cars that have less than a specific amount of mileage or are under a certain age. Some lenders will only finance vehicles over a certain price threshold. If the car you want has too much mileage, is too old, or doesn’t cost enough, you simply can get a traditional auto loan.

You can also run into trouble finding financing for a vintage or classic car because they typically violate at least one requirement from an auto loan provider.

The main advantage you see with this type of loan is that the lender puts no restrictions on how you use the money. You can use it to buy a car that other lenders wouldn’t finance. The real catch is that you often end up paying higher interest rates and other charges.

Where to Get Auto Loans

There are several common sources for auto loans. Accessing the different options can vary based on your circumstances.

Dealer Financing

Probably the most common option for buyers is dealer financing.

With dealer financing, the dealership itself doesn’t finance the vehicle. Instead, they work with a particular lender or group of lenders to provide you with loan options.

A variation on this is the buy-here-pay-here loan. Dealerships sometimes offer these loans to customers with very bad credit scrores. While it can let you access financing for a vehicle, you’ll often pay outrageous interest rates on the loans.

Banks and Credit Unions

Banks and credit unions will often offer auto loans. Banks will routinely offer financing to both account holders and non-account holders, although account holders can often get better financing terms.

Credit unions operate in a similar fashion to banks, but the account holders are the ultimate owners of the organization. In most cases, credit unions only offer financing to member of the credit union. The good news is that most offer you options to join.

Online Lenders

Another option that has grown more popular in recent years is online lenders. In many cases, what you get is a site that gets you offers from multiple lenders. This doesn’t stop you from applying to individual online lenders, but sites that aggregate offers can save you a lot of time.

It’s worth exploring all of your financing options before you commit anywhere.

Things You Should Consider

A car loan will often last for three years or more, so you want a full grasp of what the loan entails. Check the terms very carefully and look for hidden fees that can drive up the overall costs.

You should also make a point of looking around for the best auto loan rates available to you. This can make a big difference if you have a shaky credit score.

Types of Auto Loans and You

When it comes to auto loans, it’s generally less about the types of auto loans and more about the specific details. The vast majority of car buyers will wind up with a secured auto loan either through the dealership or through a bank.

What you want to focus on are the fees, interest rate, and how you’ll pay that interest over time.

Looking for more personal finance tips? Check out the posts in our Business section.