Four Types Of Car Loans: Which Should You Get?
You have just chosen to purchase a car but you’re still thinking about which car loan to get. There are many different types of car loans and some will be better suited for your lifestyle and finances. Many other factors can influence the car loan you get. The car loan that you choose will also affect how much money you can borrow for the loan and the final interest rate. Here are the main types of car loans and what you should consider when getting one.
Unsecured Car Loans
Unsecured car loans are not tied to a car or an asset. There is thus no collateral for security and the lender is dependent upon the borrower’s promise to pay the debt. To compensate for the lack of collateral, unsecured car loans usually have a higher interest rate than secured car loans.
An unsecured car loan is usually better if you do not qualify for a secured car loan, have a lower principal amount than the minimum origination amount, or are looking to purchase a unique vehicle type that cannot be classified as collateral. If you are borrowing small amounts of money, then unsecured car loans are usually better.
Secured Car Loans
Secured car loans involve tying the value of the loan to the car, which acts as security. Thus, if the borrower fails to make payments, the lender can repossess the vehicle and resell it to reclaim its losses.
This reduces the risk of the lender when they approve the car loan and also results in a lower interest rate for the borrower compared to personal or unsecured loans. Secured car loans are better if you are borrowing large amounts, and have a good credit history, score, and a stable income.
In direct financing, there is no intermediary and all communication is done directly between the borrower and the lender. You can thus get a faster preapproval process for your car loan before purchasing a car and also compare the different loans to obtain the best loan deal.
Direct financing is best if you value flexibility and customization. There are no limits to the number of loans you can apply for before or after shopping and you can fully control the loan process when negotiating with your lender.
Simple Interest Loan
Simple interest loans calculate interest on a preset periodic basis. During each period, the interest is calculated based on the number of outstanding principal on the loan. Borrowers have to make monthly payments but can make larger or additional payments to limit the interest and pay off expenses.
The simple interest loan is great for borrowers who wish to have the flexibility and predict an increase in their cash flow and wish to pay off their loan earlier, thus reducing their borrowing costs. It is also suited for borrowers who have substantial personal savings and can make early payments. This will benefit individuals as they can pay off their loans and clear their debt faster and pay less interest throughout the loan.