When buying a car, you’ll probably want to have your finances in place before you go looking for your new wheels. If you don’t have the funds saved up, you may need a car loan, so you need to choose the loan that best suits your purpose and find a lender that offers it at competitive rates.
There are several types of auto loans, which means you need to choose the right type of loan for your situation. The type of auto loan you choose will affect how much interest you pay, how much you can borrow, and how long the loan lasts. To help you make an informed decision, you need to understand the different types of car loans.
Secured loan vs unsecured loan
In a secured loan, an asset, such as your car, is used as collateral by the lender. If you are unable to repay the loan, the lender may recover the funds they lent you by selling the vehicle. This reduces the risk for the lender, so most lenders charge lower interest rates for a secured loan. There are a range of lenders in the market who will offer you a secured loan to purchase your car.
On the other hand, an unsecured loan does not require collateral. Therefore, if you default, the lender has no collateral to help recover the costs. To help lenders reduce their risk, they will offer unsecured loans with higher interest rates, assuming you can comfortably repay the loan if you’re willing to pay the higher rates.
Fixed or variable rate loans
Another factor that will go into your decision making is whether you want a fixed or variable interest rate. Secured and unsecured loans can have fixed or variable interest rates. You should also check for any other fees or charges that come with the loan.
A fixed interest rate loan means you will have a constant, fixed monthly payment amount. Fixed interest rates may be suitable for anyone who has a set budget and does not want any change in the repayment amount.
A variable interest rate loan means that your repayments could change if the lender chooses to change the interest rate. You may qualify for a variable rate loan if interest rates are reduced. On the other hand, you also run the risk that interest rates will increase and your loan repayment will increase.
Be sure to compare different car loan options from different lenders by looking at both fixed and variable rates to find the loan that’s right for you.
A personal loan is an unsecured loan that you get from a lender without any collateral offered. It works the same way as an unsecured car loan, where you pay back the borrowed money plus interest, but the funds don’t have to be used for a car if you don’t want it. As with any other unsecured loan, interest rates are often higher than a secured loan.
A personal loan may be right for you if you want funds for a car and also need additional funds for other purposes.
Used car loan vs new car loan
Getting a loan on a new car versus a used car can be different in many ways.
A loan to buy a new car may have a lower interest rate than a loan to buy a used car because a newer car is more likely to retain more of its value and less likely to break down to the point of having to be written off. . On the other hand, new cars are generally more expensive than used cars, so you may need a larger car loan. Additionally, some lenders may limit new auto loans to particular makes and models, as well as place age limits on the vehicle you are purchasing.
Used car loans are more likely to have higher interest rates because a used car is more likely to break down and less likely to retain enough value to secure a loan. However, there will likely be fewer restrictions on the type of vehicle you can buy with a used car loan, and you may not need to borrow as much money to buy a used car. occasion.
By now you may be familiar with the strict eligibility criteria of traditional lenders like banks. However, other options are available if you want to look outside of traditional loan options.
One such option is private lenders who offer peer-to-peer lending. These loans can often enjoy the same fast approval and flexible terms as traditional lenders. They can offer competitive interest rates and flexible loan options based on your income, risk profile, and other factors.
Peer-to-peer financiers also offer different auto loans, like secured loans, unsecured loans, or variable interest rate loans. This type of loan does not involve an intermediary institution between a lender and the loan applicant.
Auto dealer financing
Rather than getting car financing from a lender, you may be able to consider financing your car purchase through the dealership.
Car dealership financing involves arranging loan financing of your purchase from the car dealership. They often have partnerships or agreements with lenders, and because they are likely to bring a lot of business to these lenders, you may be able to benefit from competitive interest rates or other special features. Keep in mind that going directly to the dealership for auto financing could also mean missing out on competitive offers from other lenders.
Knowing the different types of car loans will help you when looking to finance the purchase of a new or used car. Be sure to do your research, compare different loans, and make a conscious decision before signing a car loan agreement.