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Auto Loan: What Does It Mean and What Are Its Types

Auto Loan: What Does It Mean and What Are Its Types

A car nowadays is a necessity instead of a luxury item. It provides people hassle-free travel without depending on public transport and increases the social status.

A loan means borrowing a certain sum of money from banks and financial institutions required to be repaid in a particular time frame with interest or as per the agreement.

Similarly, an Auto loan is a kind of loan which the person takes out for purchasing a new vehicle. They are generally 2 to 7 years, and the interest rate depends highly on the credit score.

There are different types of auto loans available. You can choose what suits you the best among them.

Auto Loan

Types Of Auto Loans

  • Secured Auto Loan

These auto loans are generally famous because the lender puts the vehicle as collateral. The collateral gives lenders the right to take possession of the vehicle in case of non-payment of installment.

  • Unsecured Auto Loan 

These are the opposite of secured loans. There is no collateral in place for this type. If the payment of an installment is missed, the lender cannot take possession of the article but have to try to get their payment through other legal methods.

This is the reason such loans come with higher interest rates and fees.

  • Simple Interest Loan

It is the method of calculating the amount to be repaid at the end of the term. The amount paid to the lender comprises the principle plus the interest. Under this method, most of the amount goes towards the interest payment. Only a part goes towards the principal so that the interest is paid-off first, and by the end, you are only paying the principal. It helps in the early repayment of the loan.

  • Pre Computed Interest Loan

Under this method, the interest is calculated at the beginning and divided over the term in equal parts.

  • Direct Financing

Under this, the loan is taken from the lender directly, and no middlemen are involved. Example: Taking loans from banks and financial institutions.

  • Indirect Financing

Unlike direct financing, in this, there is the involvement of middlemen like car dealerships. It is less time-consuming, but the involvement of the third party might increase the annual percentage rate (APR).

These are some of the divisions under Auto Loans. Now it’s up to you what you choose and what you feel seems best.