Approximately two-thirds of all vehicle purchases are financed. If you are in the market for a car, you are likely looking at financing options also. It is important to have some basic knowledge about the types of loans available as you shop. Here are four types of car loans you may see.
Pre-Computed Interest Loans
A loan with pre-computed interest will lay out a specific payment schedule. The schedule will include predetermined principal and interest portions. With this type of loan, there is no benefit to making small additions to your monthly payments in order to reduce the principal balance and pay less interest. The finance (interest) charge is the same each month. If you plan to pay down your loan quickly, a pre-computed interest loan may not be the best option.
Simple Interest Loans
With a simple interest loan, interest is calculated periodically. This can be daily, weekly or monthly as determined by the lender. In this scenario, the interest you pay is calculated on the outstanding principal balance owed on the loan. Therefore, the interest you pay will go down when you pay additional amounts toward the principal. This is a good loan option if you intend to pay off your loan early.
With a secured loan, the lender places a lien on property. With car loans, that lien will usually be the vehicle purchased. Sometimes other borrower assets such as another car or home will be used to secure a loan. With a secured loan, it is important to understand what assets are being put up as security. Should you default on a secured loan, assets offered as security are at risk of repossession.
Unsecured loans are not secured against any property. In cases of default, the lender must take legal action. As such, these loans are generally more difficult to obtain and carry higher interest rates.
A little knowledge can go along way when buying a new vehicle and comparing car loans.