Financing your Next Car: Learn About The Different Types of Car Loans Available

Financing a car implies that you take out a car loan that must be repaid over a specific period. By taking out a car loan, an agreement will be held to pay back the amount of money that is borrowed, as well as interest and other fees, within a determined period. Shopping around and comparing various loan offers, can help you save money in terms of fees and interest.

For this reason, financing a car has become a common practice. A car loan can be thought of as a separate purchase, which is often associated with a cost that is paid through interest and fees that might be charged by the lender.

With a PCP car finance calculator, it becomes easier to make an estimation of the total amount of loan cost, loan terms, and interest rate. For this reason, it is imperative to learn more about how car financing works and the various types.

How does car financing work?
Financing a car requires that a financial institution lends you a certain amount of money that is needed to purchase the car. In return, you must pay the lender interest over a predetermined number of months.
Various options that relate to car financing include online lenders, banks, credit unions, and finance companies. When financing is done through a credit union or bank, it may become less expensive than acquiring a loan through a dealership. After all, interest rates might be increased by the dealers to pay themselves back for making the financing possible.

Types of available loans
Auto loans often come in different shapes and sizes. As a result, this section will explain some of the types of available loans.

Secured auto loans
This is a popular type of auto loan. For this, the car often acts as a form of collateral for the debt. As a result, if a borrower fails to complete a payment, the lender can then repossess the vehicle and resell it to make up for the losses. A lien – which is a legal agreement – ensures that this is possible. In other words, this lien makes it legally possible for the lender to repossess the vehicle until the loan is repaid.

Unsecured auto loans
This involves no need for collateral for security. In this case, the lender relies more upon the promise of the borrower to repay the debt. Besides being a less common type of auto loan, unsecured auto loans are often associated with high-interest rates.

Simple interest loans
Interest can be estimated based on the outstanding principal during the period the payment is made. Take, for instance, if a $30,000 loan is paid down to $15,000, the interest, in this case, will be based simply on the outstanding $15,000. This kind of loan ensures that a borrower can save money by paying off their loan.

Precomputed interest loans
In this case, interest is estimated for the loan period, which is then divided into equal amounts that are spread over the monthly payments. With this method, estimating interest is more rigid.

Direct financing
Loans are provided to customers to buy their vehicle from any dealership by various lenders, including credit unions, banks, and online finance companies. With this approach, customers can become pre-approved for their loan before they try to purchase a car.

Indirect financing
This involves a dealership arranging financing for a car buyer, which is done by requesting a loan from a potential lender. The dealer acts as a middleman and may add a percentage point to the interest rate, which is offered by the lender.

In-house financing
This type of auto loan is related to certain “buy here, pay here” dealerships, which sell the car while also providing the loan as well. These aforementioned dealerships often focus on selling to customers with bad credit. This often comes with very high-interest rates.

Car financing is a popular practice among car owners. However, by understanding how it works, as well as the different types of available loans, you can make the best decisions.