8 Types of Auto Loans and their Differences

Learn About the Different Kinds of Auto Loans and How to Choose the Best One for You.

Auto Loans enable a person to borrow money to buy a vehicle or truck. An Auto Loan is unsecured with fixed interest rates that have to repay over three to five years. A car loan breaks up the expense of owning a vehicle into monthly installments. The loan amounts depend on the car and finances.

The interest and principal on an auto loan are both repaid monthly. A lower interest rate corresponds to a higher credit score. Most creditors keep the vehicle’s title throughout the payback term. The lender is released from the lien position, and the title is transferred to the borrower in the event of successful loan repayment. Below are the 8 Different Types of Auto Loans.

1. Secured Auto Loans

Secured auto loans are the most popular for new and secondhand automobiles. The car has a lien as collateral for the loan, and the title cannot be transferred until the debt has been satisfied or paid off. The lender has the right to seize the asset and sell it to recoup the loan balance if it falls behind on payments.

Secured loans provide borrowers with a flat amount of cash for home improvements, automobile purchases, and more. Get these loans through banks, credit unions, internet lenders, vehicle dealers, and mortgage lenders.


  • Simpler to get.
  • Tax deductions are available for certain secured loans, such as mortgages.
  • Discounted interest rate


  • Low total cost of the loan
  • Possibility of reclaiming property for failure to pay
  • Lenders usually have strict criteria that any collateral utilized for a loan must fulfill.

2. Unsecured Auto Loans

An unsecured Auto Loan is to borrow money without putting up any kind of security. The borrower’s credit history determines whether or not approved. Credit history and income are all needed to guarantee an unsecured vehicle loan repayment. PaydayChampion helps evaluate personal loan possibilities. 


  • No limitations on how to utilize the funds.


  • High financing charge

3. Simple Interest Auto Loans

Simple interest is when daily interest payments to the lender are calculated based on the principal amount of the loan and the interest rate that the lender has set. Interest payments are reduced if a borrower pays off a simple interest auto loan earlier than expected. 


  • Early repayment reduces interest.


  • First payments are mostly used to pay interest rather than principal.

4. Pre-Computed Auto Loans

Pre-computed loans are less adaptable than loans with basic interest. The borrower is required to make payments according to a schedule that is set. Each cost must include a specified amount that goes toward both the principal and the interest on the loan. A pre-computed loan with a predictable payment schedule is the best option if having a tight budget or expect an unfavorable future financial situation.


  • Get pre-computed interest if don’t qualify for a simple interest vehicle loan.
  • A precomputed vehicle loan has the same interest rate. The same as a simple interest loan if it pays the minimum.


  • Early payments are a downside of precomputed interest. Pay more interest and save less If returns the loan early.
  • Rule 78 is used on loans for 60 months or less. Have larger monthly payments if getting a pre-computed auto loan.

5. Lease Buyout Loans

Lease Buyout Loans are for a lessee who often gets the option to purchase the car for a certain sum after the lease agreement. The loan offers a way to complete ownership. The borrower makes fixed payments throughout the agreed-upon period, and the lender pays the lease buyout cost upfront. The lender’s lien on the car is released after the principal balance of the lease buyout loan has been paid, giving the borrower full ownership of it.


  • Possible use, whether the plan is to retain or sell the current vehicle.
  • Permitted by the vast majority of car lots and lease providers.


  • To apply for financing if there is insufficient cash to finance the purchase is a requirement.
  • Come with additional costs such as loan charges or fees.

6. Title Loans

A title loan enables one to borrow money directly from the automobile’s value, just as a home equity loan does. Once the loan is approved, the lender seizes the title and files a lien on the car. Although the lender has the right to reclaim the vehicle if the borrower defaults, the borrower continues to use it.


  • Accessible to everyone. The good news is that loan providers won’t consider the credit score of using automobiles as collateral. Don’t freak out if having a low credit score and nowhere else to turn for money. An automobile that runs properly increases the chances of getting the needed money.
  • Fast Money. It is normally quick to submit an application and get approval. PaydayChampion makes it easy to start immediately; just fill out the short online form on this page. With most services, expect the funds to be deposited the next business day. The value of the vehicle determines how much to apply.


  • High-interest and fees. Installment loans include significant interest and fees, comparable to payday loans, depending on location and lender. Examine all applicable policies before making a decision.
  • Car-loss risk. Unpaid loans lead to car repossession. The lender gets more from selling the car than if paying off the debt.

7. Direct Financing

Direct Financing is when the borrower and the lender transaction occurs directly. Banks, credit unions, and internet lenders are direct financing sources. To obtain a loan before visiting the auto dealership, it’s often a smart idea to apply directly to lenders. Credit rating and payment history factor into the interest rate given. Get the best rate by comparing the dealer’s financing choices. 


  • Loan offers without third-party screening.


  • Separate lender applications take time.

8. Indirect Financing

Indirect financing takes several forms, one of the most frequent being dealer-arranged loans. The dealership’s financing department applies to some of the same lenders with access. Many consumers choose indirect financing due to its convenience. However, remember that dealers boost customers’ APRs and keep the difference. The dealer needed to provide the most cost-effective option in certain cases.


  • Receive various offers by completing one form


  • Dealerships hike APR and hide offers.

What is an Auto Loan?

Auto loans are secured loans used to purchase new or used vehicles, end a lease, and refinance current auto loans. Banks, credit unions, and online lenders are some places to get an auto loan. The car itself serves as collateral for the loan. Each lender sets its standards for auto loans. Each borrower’s interest rate is unique depending on the credit rating, the age of the vehicle, the sort of loan to get, and the amount of equity in the car.

What is the Most Common Type of Auto Loan?

The most common type of auto loan is a secured loan. Secured loans let borrowers acquire funds or make significant purchases, like a house or vehicle, with fewer conditions than unsecured loans. Borrowers get low-interest loans by pledging assets. Secured loans reduce lenders’ risk since repossessing the collateral if the borrower fails.

Lenders who provide secured loans place a lien on the collateral received. Once the debt is paid off, the lender releases the lien and becomes the sole owner of both assets. These types of assets are used as security for a secured loan.

  • Property
  • Funds (checking accounts, savings accounts, CDs, and money market accounts)
  • Vehicles (cars, trucks, SUVs, motorbikes, boats)
  • Mutual funds, stocks, or bonds
  • Insurance, including life
  • Premium items and valuables (precious metals, antiques, etc.)

What is the Best Type of Auto Loan?

The best type of loan determines which choice best meets the financial goals and spending plan. Whether wanting to purchase a new or used automobile. Refinance existing loans to achieve favorable financing terms or borrow against the vehicle’s equity. Research the benefits of each auto loan type before determining which is ideal. Additionally, shop around to find the best lenders and get pre-approved to ensure a fair loan offer.

How to Choose the Best Type of Auto Loan?

The easiest way to choose the best auto loan type is to look around for the car loan conditions that make the most sense. Selecting a car’s financing method is more crucial than picking a color. Do some research before heading to the dealership and get a loan with more favorable conditions than the dealership.

  • Where to obtain a loan?

It is a good idea to consult with other lenders first, although auto dealers are often ready to provide in-house financing for car purchases. Compare prices. Prepare a list of inquiries, and ask prospective lenders about the overall cost, loan term, interest rate, and any possible penalties.

  • How to qualify?

Provide the following information in applying for an auto loan.

  • Full name and identity documentation
  • A recent electricity bill and the address
  • Employment background and gross monthly income
  • A list of the resources and costs
  • Signed consent allowing the lender access to the credit record
  • Car information (year, make, model, etc.)

Determine how much wanting to pay for the monthly automobile payment. Then analyze options for the finest auto loans. Doing the study before visiting dealerships helps negotiate better terms. Many auto shops create arrangements that benefit the customer.

  • How to decide on a choice using a car loan calculator

Focus on the entire cost of the car once had one in mind (keep in mind that there are other costs such as tax, title, and license on top of the basic price). Calculate the actual costs based on the loan’s duration and the financing choices.

Inputs for the car loan calculator include the following:

  • The car’s total price
  • Any trade-in vehicle’s value
  • necessary down payment
  • The interest rate in the vicinity
  • the state’s sales tax
  • Duration of the loan
  • Application for a loan

It’s time to submit an official application after deciding on the desired loan automobile. The approval process is quick if having a stellar credit history and stable, long-term work. The approval process sometimes takes a day or two.

How to Identify the Different Auto Loan Types?

Identifying the other auto loan types to simplify financing alternatives by availing the different auto loans on the market helps to pay off the loan responsibilities rapidly. Seeing the distinctions between auto loan types help the borrower to choose. It highlights the commitment made when selecting a variety of loans. Auto loans vary by

  • Where to buy
  • What kind of car purchases are used
  • Whether the car is the collateral for the loan

How to Apply for an Auto Loan?

Appy an auto loan in various methods to pay for a car. Direct lending from a lender is one choice, and another is to complete a finance application at the dealership and have the dealer handle everything.

Online Auto Loan

The steps to take if choosing the direct approach are as follows:

  1. Option comparison. Compare three to five different car lenders. Prequalify with certain lenders to get a rate quote without doing a thorough credit check.
  2. Gather data. Lenders request identification, income, job, and residency evidence.
  3. Apply. Supply information on the car wanting to purchase. In addition, provide personal information, the amount to borrow, and the preferred payback period.
  4. Find an automobile at the dealership and drive off. Begin shopping after having a pre-approval. Let the lender know and complete the transaction once located the ideal model.
  5. Adopt the loan conditions. The lender gives a preapproved loan amount and needs to take it to the dealership, but the loan only is completed once decided on a car.

Dealer financing

One benefit of dealer-arranged financing is that the dealer does most of the research:

  1. The dealership needs paperwork. Proof of insurance and a current driver’s license is standard when applying for a vehicle loan from any financial institution. Sign a purchase agreement, title, odometer statement, and damage disclosure statement when purchasing a vehicle from a dealer. Get copies from the seller and don’t sign ambiguous documents.
  2. Pick an automobile. Spend some time looking around and comparing models from various vendors.
  3. Credit application. The dealership provides a credit application to fill out, which it then submits to lenders along with information on the car.
  4. Dispute a proposal. To compare deals, request to view all of them. Remember that some dealers provide interest rates greater than those offered by direct lenders and retain the difference as compensation. Consider obtaining preapproval before visiting the dealership to prevent this.

What is the Best Interest Rates for Auto Loans?

The best interest rates for new auto loans are 2.09%, while the best rates for used car loans start at 2.49%. The lowest interest rates typically apply to borrowing durations of 24 to 36 months or less. Research and gather prices from several lenders to see which offers the most favorable terms for auto loans.

Many lenders compete to provide car loans. It affects vehicle loan terms and rates. The top three categories of car lenders are shown below.

  1. Internet lenders

Online lenders are alternatives to conventional banks. It is usually repaid in monthly installments from the borrower. 

  1. Financial Institutions

Searching online is a good place to start, but get more detailed information from a bank or credit union. Find out whether Lenders provide pre-approvals to estimate how much to borrow and the APR. Gain more negotiation leverage with the third-party vendor.

  1. Automobile Dealers

Car dealerships provide fast and simple financing for all buyers by collaborating with auto finance providers. The auto dealer makes the loan application process appear simpler, but it’s wise to search for rates and conditions to obtain the best offer.





Personal Finance Writer at Payday Champion

Kathy Jane Buchanan has more than 10 years of experience as an editor and writer. She currently worked as a full-time personal finance writer for PaydayChampion and has contributed work to a range of publications expert on loans. Kathy graduated in 2000 from Iowa State University with degree BSc in Finance.

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