Industry Insider – Car Loans: Understanding Your Options

Regardless of whether you are considering a new car or one that is used, it is important that you understand all of the options available when it comes to auto loans. Because a vehicle is one of life’s major purchases, taking the time to research and determine the best loan type for your situation is a vital step in the process of buying a car.

The Most Common Types of Automobile Loans

Simple interest loans may be the most widely used type of auto loan; this kind of loan has an interest rate that is based on the outstanding balance of the principle. Many borrowers choose to make larger payments than they are required to make on simple interest loans to pay them off quickly, thereby saving money.

While still one of the most common types of automobile loans used, the pre-computed loan is not used nearly as often as it was in the past. Pre-computed loans refer to those that calculate and divide the principle and interest of the loan into payments before the borrower and lender sign the paperwork for the loan. Although some buyers prefer this type of lending, it does not allow borrowers to save money by paying off the loan early.

Secured and Unsecured Car Loans

Not every buyer will choose a simple interest or pre-computed loan when they are ready to buy a car. In fact, some may even need to consider less conventional options because of non-traditional employment or a poor credit history. Both secured and unsecured loans are available to those buying cars, and one or the other of these may make it easier for some borrowers to get back on the road.

Secured auto loans require collateral, which is often in the form of another car or even the borrower’s house. Often used by those with less-than-perfect credit, borrowers who default on a secured loan will likely see the lender take possession of the property they put up as collateral for the loan; while certainly not a perfect system, secured loans provide borrowers with excellent incentive to make their payments on time.

Unsecured loans are typically given to borrowers with acceptable, regular employment and a strong credit history. Although one of the most widely used loans for purchasing an automobile, the unsecured loan is often attached to a high interest rate due to the risk that the lender is taking.

Lease Buyouts and Refinancing

As is the case with any type of lending scenario, the kinds of car loans available do not necessarily fit neatly into a couple of pre-determined categories. Falling outside the most conventional categories of car loans are lease buyouts and refinancing.

Leasing a car may appear to be the most affordable option when choosing how to finance an automobile purchase; whether or not this is true varies between individuals, but the fact that those who lease can later seek ownership of their vehicle through a lease buyout makes the idea attractive to many people. Lease buyout loans are available to those who cannot afford to buy out the lease on their automobile in cash, so they approach a traditional lender and borrow just the amount needed to cover the lease buyout option on the vehicle.

Refinancing a car is best described as taking out a loan on an existing loan. Often used when a borrower can no longer afford to make payments on a pre-computed car loan, refinancing usually lowers the size of an installment payment. While this is an ideal solution for some borrowers, it may result in a slightly higher interest rate than that which they were paying on the original loan.

Home Equity and Title Loans

Borrowers who have made enough payments on their house to have accrued some equity may be qualify for a home equity loan. While this option is not right for everyone and some homeowners may not qualify, the fact that the interest rate on a home equity loan is often tax-deductible may make it very attractive to some borrowers.

Title loans are also an option for buyers who need to generate money to purchase a vehicle; while not legal in every state, many areas do allow this type of lending. A title loan uses an automobile that is fully owned as collateral for a loan. However, the title loan is often subject to incredibly high interest rates, and the terms of the loan should be fully understood before the borrower agrees to this particular type of lending.

Finding the Best Auto Loan Solutions

Banks, credit unions and car dealerships are among the most common places that borrowers seek car loans, and while such traditional lenders usually prefer to work with those who have average-to-good credit, options do exist for those with lower credit scores.

Regardless of where you choose to seek the loan for your next new or used car, doing the necessary research before committing to any type of car loan may be a good way to ensure that you are getting the best interest rate possible on your new ride.

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