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Banking and Finance

A Simple Guide on the Common Types of Car Loans

A Simple Guide on the Common Types of Car Loans

In 2021, there were around 15 million cars sold in the United States. Due to the increase in demand from supply chain issues, the cost of both used and new cars for sale is on the rise.

If it’s time to upgrade your car but you’re worried about the cost, several types of car loans are available to help you get payments within your budget. In this guide, we’ll tell you about the different types of auto loans.

Direct Auto Loans

Direct auto loans are similar to the preapproval process when buying a house. Instead of starting at the dealership, you go to your bank, credit union, or another lender who preapproves you for a loan before shopping for your new car.

Indirect Loans

With indirect car loans, the dealership acts as the middle man and requests a loan from a lender on your behalf. While these loans can have higher interest rates, dealerships may have established relationships with financial institutions and might be able to pull strings to get you in the payment range that you need.

In-House Financing

When buying a car from a dealership that offers in-house financing, the dealership sells the car to you and provides the loan. This type of financing often has a higher interest rate but can accommodate lower credit scores than some banks.

Lease Buyouts

When you lease a vehicle, you pay to use it for a fixed time range. When that time period is up, you have the option to return it back to the dealership or buy it. A lease buyout loan allows you to keep the car and continue making payments until you have full ownership.

Secured vs. Unsecured Auto Loan Terms

When researching how to buy a car with different types of loans, determining whether loan terms specify secured vs. unsecured is one of the most important car buying tips.

A secured loan is when the lender uses your car as collateral to guarantee payments. These loans often come with lower interest rates, but you risk losing your car if you’re ever unable to make payments.

An unsecured loan might come with higher interest rates, but you won’t have to worry about repossession if you experience a life change that results in missed payments.

Learn more about car payment statistics at

Types of Interest

Car purchases come with either simple or pre-computed interest rates. Simple interest is when your interest rate changes based on your loan balance. This allows you to pay less in interest as you pay more of your loan.

Precomputed interest is less common in auto loans. This is when all of your interest fees are predetermined when you buy the car. With this option, you know how much interest you’re paying each month and it doesn’t change.

Know the Different Types of Car Loans Before You Shop

Before you even step foot in a car dealership, you should understand the types of car loans available. Knowing what you qualify for and what works best for you will allow you to make an educated financing choice that doesn’t break your budget.

Interested in more helpful guides? Take a look at our other articles.

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