Needs to know before taking out an auto loan

With lowest interest rate car loan gives you an advantage and earns you money over the life of your loan. If you have a car loan, your monthly payment can be lower and you save money by refinancing car loan.

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A car loan is a personal loan used to buy a vehicle. Borrower (person who wants to have a car) borrows from a lender to purchase a car. Then the lender is paid back the amount of the loan and interest amount based on the designated car loan interest rates.

With lowest interest rate car loan gives you an advantage and earns you money over the life of your loan. If you have a car loan, your monthly payment can be lower and you save money by refinancing car loan.

Types of Car Loans

Secured Car Loans

For secured car loans, the car is thought as collateral for the debt. When the borrower could not make the monthly payments or the whole payment, the lender can take back car and resell it to cover his losses. This situation is a legal arrangement that collateralizes for protecting lender’s legal rights and defines as a lien. Most of car loans are secured loans.

Unsecured Car Loans

Unsecured car loans are that lender trusts the borrower’s promise to make payments, and these loans are less common. If the borrower doesn’t repay for dept, the lender cannot make a claim. And the only disadvantage for borrower is higher interest rates and high cost.

Simple Interest Car Loans

For simple Interest loans, interest rates are calculated on the principal at the time of payment. Thereby, if the borrower repays early for the debt, it pays off faster, less interest over the life of the car loan and so saves money.

Pre-Computed Interest Loans

Loan interest rates is determined as monthly and equal amounts before. Even if the interest rates raise, your car loan rates don’t change. On the other hand, it won’t save money when the borrower pays off early.

Direct and Indirect Financing

Direct financing is an easy option to get a car loan. Borrower applies for a designated lender, receives approval and then have a car by borrowing. Indirect financing is a way that a dealership finds financing for a car purchaser. Dealer can add percentage 1-2 to interest rate offered by the lender.

In-house Financing

In-house financing is usually a right car loan for bad credit. Because the consumers directly sell the car to customers and the borrowers pay off to dealership. This type of car loans has higher interest rates compared to others.

New and Used Car Loans


Naturally, new cars are more expensive, however, new car loan rates are lower. This is mainly because new cars are easier for lenders to be revalued when they need to, and the risk of repurchase is lower.

Didem Sagindik
is a Sr. Research Analyst at Financhaser, focusing on Loans. She has PhD on Business Management.

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