Buying your dream car can be a fascinating and overwhelming process. Choosing the right car model and getting the best auto loan deal requires adequate research to fulfill your needs. Getting a car loan can be very tricky, especially if you are in the market for the first time. You’ll be exposed to vast options, and without prior knowledge, you may end up making the wrong choice.
To guide you and give you a proper understanding of your loan options, we have outlined the various types of car loans and how they can benefit you.
Secured Auto Loans
Most car loans are secured by the underlying asset. This means the car acts as collateral for the loan, such that if the borrower fails to make the monthly payments, the lender can take possession of the vehicle. The lending bank or finance company is listed as lien holder on the car’s title until the loan is fully repaid. Since secured loans are less risky, they come with lower interest rates. They are a great choice if you are looking to get the lowest interest rates on your loan. The rate you get would, however, be determined by several factors including the loan term and your credit score.
Unsecured Auto Loans
Unsecured loans, unlike secured loans, are not protected by an asset. The lenders don’t get a lien on the vehicle’s title and can’t repossess it if the lender defaults on the payments. The lender only relies on the borrowers promise to repay the debt without any form of collateral. Unsecured loans are less conventional and come with higher interest rates, as it exposes the lender to more risk. If you don’t want to tie your new car to the loan, then an unsecured loan would be perfect. However, it’s usually offered to people with high credit scores and a substantial asset and income. The interest rate for your loan will also depend on your credit score and other factors.
Simple Interest Auto Loans
Simple interest loans offer flexible payment options to borrowers. It requires a monthly payment with the opportunity to pay off part of the principle. These loans allow you to pay off your loan early and save money. Interest is calculated on the outstanding balance of the principal at that specific time. For instance, if your initial loan amount is $50,000 and you paid down $20,000, you will only pay subsequent interest on the outstanding $30,000. This loan type is ideal if you have substantial income or savings to pay your loans early. It can reduce your borrowing cost and save you money.
Private Party Purchase Auto Loans
Private party loans are for persons wanting to buy a car from an individual instead of a dealership. The financing steps to buying a car from an individual are no different from that of purchasing a used car at the dealership. The most critical issue to consider however is whether there is an outstanding online title loan in Phoenix on the vehicle, whereby the seller still owes for the outstanding loan on the car. In such a situation, the finance company with the seller’s lien will not allow the deal to go through unless the original loan is discharged. So your financial institution will likely insist that an amount equaling the outstanding debt on the lien be deposited in an escrow, to be paid to the original finance company when the deal goes through.
Pre-computed Auto Loans
The pre-computed auto loans are rigid compared to simple interest loans. The interest rate and repayment are calculated for the period of the loan and divided into equal parts spread every month over the life span of the loan. The interest rate is not flexible, and accelerated payments don’t reduce the interest or the principal. As such, even if you make a down payment of $20,000, you will still have to pay the same amount of interest each month. If you have a limited budget or a monthly fixed income, then the pre-computed auto loans give you the benefit of a predictable repayment schedule.
Lease Buyout Auto Loans
Lease buyout auto loans, as the name sounds, provide a path to full ownership to a lessee who wants to purchase the vehicle at the end of the lease contract. This loan allows the lessee to make payments to the lender over a preset term to buy the car outright. Once the principal is paid off, the lender’s lien on the vehicle is lifted, and it belongs to the lessee. Purchasing a vehicle you have leased is an excellent option because you would have become familiar with its maintenance and history throughout the lease to know whether it is the right vehicle for you or not. Also, it will allow you to avoid penalties for damages like wear and tear or going above the specified mileage.
Dealer Purchase Car Loans
Car dealers often offer car loans to their consumers. This eliminates the need to source separately for loans, making the dealer the one stop shop for your car and financing. Most Car dealerships have relationships with financial institutions and lending companies and help the consumer push through loans they can’t get on their own. This, however, comes at the price of surrendering your ability to shop around for better offers. Additionally, these loans are only available for people with an outstanding credit history.
Making the Right Choice
Each loan type is different and has a specific advantage. Regardless of which one you want, it’s essential that you look around before making a decision. Car loans usually cost thousands of dollars and choosing a loan type that suits you will save you money and ease your repayment.