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There are multiple types of car loans you can get if you need to buy a new or used car. The general type of auto loans you may apply for include secured auto loans and unsecured auto loans.Other auto loan types, such as subprime car loans, may fall into the general category of being secured with collateral or unsecured without collateral. A car loan is a form of closed-end credit that helps you purchase a vehicle. Below we highlight 10 types of car loans that you may get from a bank, credit union, or private lender.
1. Secured Auto Loans
Banks, credit unions, and private lenders may offer secured auto loans. A secured auto loan is a form of financing in which the car buyer borrows money to buy a vehicle and then pledges the vehicle as collateral on the loan.Borrowers are expected to repay a secured auto loan over a set term that can generally range from 12 months to seven years or longer. Some lenders may even offer secured 144-month auto loans, particularly when financing exotic cars that cost more than $100,000.Lenders may seize the vehicle if a borrower defaults on the secured auto loan. A lender may find a borrower in default if the borrower fails to make required monthly payments.Recommended: Can You Have Two Car Loans At Once?
2. Unsecured Auto Loans
Lenders may offer unsecured car loans. The difference between secured vs. unsecured auto loans is that the vehicle serves as collateral on the secured loan, whereas borrowers pledge no assets as collateral on an unsecured car loan.Unsecured auto loans present more risk to the lender. The interest rate you get on an unsecured auto loan, therefore, may be higher than the interest rate you might get with secured auto loans.Borrowers may need good credit to qualify for an unsecured auto loan. Your credit score may plunge if you default on an unsecured auto loan. Lenders may also sue you for breach of contract if you fail to make required payments on the unsecured financing.
3. Simple Interest Auto Loans
A simple interest auto loan is a car loan that charges simple interest on the outstanding balance of your loan each month. The loan may include a fixed annual percentage rate of interest, also known as APR, and your monthly payment would go toward interest charges and repaying the principal loan amount.Paying simple interest on the outstanding balance of your loan means the amount of interest you owe will decrease as you pay down the principal. You might have a fixed monthly payment, and more of your monthly payment goes toward repaying the principal as you get closer to the loan maturity date.For example, a simple interest auto loan that provides $25,000 of financing on a 60-month term and 6.84% interest rate would feature a $493.14 monthly payment. The first payment on the loan would cover $142.50 in interest, while the 60th and final monthly payment would cover $2.79 in interest.Making extra payments on the simple interest auto loan or paying the debt off early could minimize the amount of interest you pay over the life of your loan. Some lenders, however, may charge prepayment penalty fees if you pay the loan off early. Lenders may disclose prepayment penalties in the terms and conditions of your loan agreement.Recommended: Car Loan Terms Explained
4. Precomputed Interest Auto Loans
Some lenders may offer precomputed interest auto loans. This is a car loan in which the lender calculates the finance charges upfront and adds it to the principal balance of the loan. The combined sum of your interest charges, principal loan amount, and any other finance charges represents your starting account balance. The lender would divide your starting account balance by the length of your term to calculate your monthly payment on the precomputed interest loan.For example, a $25,000 precomputed interest auto loan that charges a $250 origination fee and $3,600 in interest over a 60-month term would have a $28,850 starting account balance. The lender would then divide this starting account balance by the 60-month term to calculate the borrower’s monthly payment as $480.83You may be entitled to a refund if you pay off the precomputed interest auto loan early. Prepaying a precomputed interest auto loan, however, is generally not as beneficial as prepaying a simple interest auto loan. That’s because any refund you get from prepaying a precomputed interest loan is generally lower than what you might have saved if the loan had a simple-interest cost structure.
5. Direct Financing Auto Loans
Consumers can go to a bank, credit union, or private lender requesting direct financing auto loans. This means you can go directly to a lender and submit an application for auto loan financing.The way how car loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include interest charges.Lenders may impose late fees if you fail to make a timely payment on your loan. But lenders may also honor a car payment grace period before such penalties would apply.Borrowers are expected to provide proof of identity and proof of income when applying for auto loan financing, among other requirements for a car loan.
6. Indirect Financing Auto Loans
Consumers can go to car dealerships and see whether dealers can arrange indirect financing. If you seek indirect financing through a dealership, it means you want to buy a car off the lot and hope a dealer has a financing solution.You may qualify for indirect financing auto loans if you have steady income and good credit. If you qualify, the dealer may present you with an offer. If you accept the terms and conditions of the offer, the dealer may ask you to sign a retail installment sale contract and related documents to formalize your purchase of the vehicle.A dealer may then sell the retail installment contract to a third-party lender, such as a bank or finance company. This provides the dealer with full payment for the car, and it allows you to keep the vehicle in your possession as long as you make regular payments to the third-party lender.This is called indirect financing because it leaves you indebted with a third-party financial institution that didn’t provide you with the auto loan financing directly.Recommended: 11 Simple Tips to Pay Off an Auto Loan Faster
7. Subprime Auto Loans
If you have bad credit, it may be harder for you to get approved for auto loan financing compared with prime and super prime borrowers. Some lenders, however, may offer subprime auto loans to borrowers with credit scores at or below 600.Some of the major credit scoring models, including VantageScore® 4.0 and base FICO® Scores, range from 300 to 850. Financing data from Experian show that deep subprime borrowers (credit scores between 300 and 500) had an average new monthly car payment of $719 and an average used monthly car payment of $532.This shows that consumers with bad credit may qualify for auto loan financing, but consumers with good credit may qualify for better rates of interest. Subprime borrowers had an average new auto loan rate of 13.18%, while super prime borrowers with credit scores between 781 and 850 had an average loan rate of 5.25% when financing new vehicle purchases in Q2 2024.Consumers with good credit may qualify for auto loans with 0% APR. The average interest rate on new car loans in the second quarter of 2024 stood at 6.84%, according to Experian data.
8. Title Loans
Car owners who need to borrow quick cash may consider title loans as a source of financing. A car title loan is a collateralized loan secured by your vehicle. This loan works by allowing car owners to borrow against some of the equity in their cars.Borrowers can spend title loan funds on almost any personal expense. Title loans generally include finance charges that can amount to 300% APR in some cases.Title loans generally have short terms measured in days, not years. Borrowers in some cases may have to repay the loan in full within 30 days. Title loan lenders may seize your vehicle if you default on the loan.
9. Lease Buyout Loans
If you’re driving a car with a lease contract, lease buyout loans can provide you with financing to become a car owner. A car lease is a temporary rental agreement allowing you to drive a vehicle owned by another party, usually a leasing company or dealership.Lessees must return the vehicle when the lease contract ends, unless the lessee has the option of buying the vehicle. Banks and other lenders may offer lease buyout loans providing you with financing to purchase the car.If you like your leased vehicle and would like to own it, a lease buyout loan can help you make that transaction.
10. Private Party Auto Loans
A private party auto loan can provide you with financing to buy a used vehicle from a private person selling a car. Banks, credit unions, or nonbank financial institutions may offer these loans.Private party auto loans can help you purchase a used vehicle from a friend, colleague, neighbor, or other private person not connected to a dealership.
Which Auto Loans Can You Refinance?
Borrowers with existing car loans may qualify for auto loan refinancing. Getting your auto refi loan application approved means a lender will pay off your original loan agreement and replace it with new loan terms. The refinanced loan may feature a lower monthly payment than your original loan.Almost any auto loan can be refinanced if a borrower and the borrower’s vehicle meet a lender’s refinancing qualifications. Here are some of the auto loans that may qualify for refinancing:
If you’re burdened with car payment debt and would like to explore auto loan refinance options, Lantern by SoFi can help. Refinancing might be right for you if you can lock in a lower interest rate. Explore your options today and consider applying with a lender of your choice.Find and compare auto loan refinance options with Lantern.
Frequently Asked Questions
Are there different types of auto loans?
What is a secured auto loan?
What is an unsecured auto loan?
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About the Author
Sulaiman Abdur-Rahman
Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
