Are There Different Types of Auto Loans?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - June 21, 2021

Yes! There are different types of auto loans, different types of auto lenders, and even different bad credit car loans to choose from.

How Auto Loans Can Differ

Car loans typically come in two main forms. The most common type of auto loan is a secured loan.

A secured car loan is when the lender places a lien on the vehicle’s title. This means the lender can repossess the vehicle if the borrower fails to repay the loan or breaks the contract. Since secured loans come with less risk (borrowers are more likely to pay on the loan if there’s a risk of repossession), these loans typically offer lower interest rates than unsecured loans. Secured loans are very common for large purchases, such as vehicles and homes.

Unsecured auto loans mean there isn’t a lien on the title of the vehicle. The lender can’t repossess the vehicle if the borrower defaults on the loan – they can simply make collection efforts on the balance. However, unsecured car loans aren’t very common at all. Since there’s more risk, unsecured loans usually have higher interest rates compared to their secured counterparts. Unsecured loans typically included credit cards or personal loans.

Auto Loan Interest Formulas

There’s typically only one type of interest formula for a car loan, no matter what type of loan you choose or what lender you work with – the simple interest formula.

Simple interest is when your interest charges owed to the lender are added up daily based on the loan’s balance and the rate assigned by the lender. Over time, your interest charges decrease with each on-time payment because the balance goes down with each payment. A simple interest car loan offers the borrower the ability to lessen their interest charges if they pay down the loan quicker than scheduled.

There are precomputed interest auto loans, too, where all of your interest charges are predetermined. The interest charges are precalculated and evenly distributed across all payments, so you’re paying the same amount of interest each month. It also means that paying extra or early doesn’t decrease your total interest charges, unlike simple interest. But as we’ve mentioned, a precomputed interest formula isn’t very common.

Different Auto Lenders

Many traditional lenders may require you to have a credit score of above 660 to be considered for a car loan unless you work with lenders that specialize in assisting with unique credit circumstances. Your overall credit history matters, too, since borrowers without a long history of on-time payments may pose less of a risk to a lender. Having a down payment can increase your approval odds as well, regardless of the type of lender you choose to apply with.

If you have good credit and sufficient proof that you can handle a car loan, you may be able to go to a variety of traditional auto lenders:

  • Direct auto lenders are commonly a go-to choice for borrowers with good credit. They include lending institutions such as banks, credit unions, and online lenders. Many borrowers apply for a car loan with their personal lending institution and often talk with a person directly about their lending options. If you’re eligible, the lender can send a check to the dealership to pay for the car or hand you a check to give to the dealer. Direct lenders typically require a good credit score to be eligible for vehicle financing.
  • Indirect auto lenders can include third-party lenders such as the captive lenders of automakers or subprime lenders signed up with dealerships. Borrowers can go to the dealer’s finance department and apply for a car loan on-site, sometimes with multiple lenders at once. The finance manager at the dealership acts as a middleman between you and the lender(s).

If you have poor credit, here are some lenders to check out for a higher chance of eligibility for vehicle financing:

  • Subprime lenders are indirect and signed up with special finance dealerships. They often work within tough credit situations such as bad credit, bankruptcy, past repossession, and first-time car buyers. Your credit score is considered in the big picture, but a poor credit score isn’t typically enough to knock you out of the running for an auto loan because they specialize in assisting with unique credit circumstances.
  • In-house financing means the lenders are the dealers, and these auto loans are issued at buy here pay here (BHPH) dealerships, or independent used car lots. For borrowers with serious, recent credit problems, these lenders may be able to help. Many BHPH dealers don’t pull your credit, making your income, down payment, and living stability the most important factors in your eligibility for vehicle financing.

The Cost of a Secured Simple Interest Auto loan

Now that you know how you're most likely to find a secured car loan with a simple interest formula, here’s what that means for you as a borrower.

Taking on a secured, simple interest auto loan means that the lender puts a lien vehicle’s title, and you’re required to have full coverage auto insurance since it’s the lender’s asset until you complete the loan.

Lenders also charge interest on their car loans. Since most every car loan is simple interest, the length of your loan term and the rate you qualify for are vital to how much you pay over time. For borrowers with less than perfect credit, this means that you’re more likely to pay more in interest charges than a good credit borrower since your credit score is usually the most important factor in determining your interest rate.

If you want to mitigate interest charges on your simple interest car loan, then it’s recommended that you put money down on the vehicle to lower your financed amount and choose a short loan term. Simple interest adds up daily, so the shorter loan term you take on, the less interest you must pay the lender. By making more frequent payments, extra monthly payments, or paying off the loan in a lump sum, you’re giving the loan less time to build interest, which saves you money overall.

On the Lookout for Your Next Auto Loan?

Here at CarsDirect, we aim to assist borrowers in their car buying journey whether you’re in need of local listings for new or used vehicles or you need bad credit lending connections. Using our expansive network of dealerships across the country, we want to look for a special finance dealership in your local area that assists borrowers with credit challenges.

Get started by completing our free auto loan request form and we’ll look for a dealer near you.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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