It’s interesting to know that more than two-thirds of all the car purchases, both new and used, are financed by borrowed money. This figure rises if one only considers new cars. Of all the people who borrow money to buy a car, half of them take a loan from the dealership, whereas the other half get funds from credit unions, banks, and internet lenders.
Before one goes off to buy a new car, they must understand the different types of loans available.
A secured auto loan, as the name suggests, is a loan for which the vehicle acts as the security. It is one of the most popular types of auto loan, where the bank or finance company has a security interest in the car itself. They are certified to seize the vehicle if the borrower defaults on the loan. Thus, in many aspects, secured loans are similar to a mortgage.
The lender has no security interest in the vehicle with unsecured loans. It is similar to using a credit card to make a purchase. Unsecured auto loans are usually offered to people with high credit scores and substantial income and assets. Since the lender takes more risk than the borrower, the interest rates are considerably higher than secured loans.
The interest is the price you pay for borrowing money from the lender to finance a vehicle.
Simple interest loans
With a simple interest loan, one needs to make a monthly payment that includes the payment of the interest on the loan’s outstanding balance. Therefore, if you initially borrowed $20,000 to buy your vehicle, and have paid off around $12,000, you will only have to pay interest on the outstanding amount of $8,000.
Pre-computed interest is based on a calculation of what the total interest will be over the loan’s tenure. Then, that figure is divided by the number of months of the loan’s tenure. The monthly interest payment remains the same for each month of the loan’s term. Thus, with pre-computed interest loans, you pay the same amount of interest each month, regardless of the balance on the loan.
Dealer purchase car loans
Car dealerships also provide vehicle financing. Here, the office of the dealership salesman becomes a one-stop shop for both the vehicle and the loan. There are financial arrangements between car showrooms or dealerships and lending companies. Thus, the dealer will help you get an auto loan from one of these lending companies. While this is a convenient option, it comes at a relatively higher price. When customers get financing from a dealership, they do not get a lot of choices either. Thus, by not shopping around for better options, you might miss out on a better loan.
Lease buyout car loans
In lease buyout loans, financial institutions lend you the money to buy the car that you have been leasing from them once the term has ended. It may be a good option to buy the vehicle that you’ve leased. By the end of the term, you are already familiar with your car’s maintenance and accident history. Moreover, since you have had years of test-driving the vehicle, you know what you like and don’t like about it.
Regardless of the kind of auto loan you want, it’s important to shop around. A car loan is not just another bit of paperwork that one needs to go through before buying a vehicle. It’s like a purchase in itself, and if not done right, might cost a customer hundreds or thousands of dollars more.