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9 Types of Vehicle Finance and When to Use Them

You’ve got your eyes set on a beautiful car, and you can’t get it out of your head.

Perhaps you’re just out of university and are buying a car for the first time. Perhaps you’ve driven your 30-year-old beloved car into the ground, and it’s time to get a new one. Or maybe you were involved in an accident that left your previous car undrivable.

Your specific situation requires a specific solution. Unless you have done quite well for yourself and plan on buying your new or used car in cold hard cash, you’ll need to know how to buy a car on finance.

Although not as varied as the cars themselves, there are a wide array of available vehicle financing options, and you’ll need to make sure you choose the one that is right for you.

If you are unsure about the types of vehicle financing available to you, read on to find out more about your options.

1. Secured Auto Loans

In a secured auto loan, the car itself acts as collateral for the debt you incur. If you fail to make payments as the borrower, the lender will be able to repossess your car to recoup its lost financial investment into you.

Additionally, the lender is listed as the car’s lienholder, a legal agreement that allows the lender to take your car and resell it without your say. In this case, your lender is the rightful owner of the car. Most car loans are secured loans.

Best to use when: you are aiming for a traditional used or new car purchase. Useful in most situations.

2. Unsecured Auto Loans

Unsecured auto loans give the lender less peace of mind and are quite rare. This type of loan does not require any collateral such as your car, house, or bank account information and relies on your promise to pay. This type of loan is much less common than secured auto loans and often comes with higher premiums and interest rates than other options on this list.

Your lender will report you to the credit bureaus if you fail to pay back your unsecured auto loan.

Best to use when: you are a seasoned car buyer with a high income and valuable assets.

3. Simple Interest Loans

Simple interest loans are calculated with the outstanding principal at the time of purchase. This interest is then recalculated at different intervals depending on how much you still owe. This type of loan benefits those with high-ceiling payback options. Interest is calculated on the outstanding principal at the time the payment is made.

Best to use when: you plan to pay back large chunks of principal quickly.

4. Precomputed Interest Loans

During precomputed interest loans, your interest is calculated for the loan duration divided proportionally based on your monthly payments. This type of loan is more rigid and strict than simple interest loans because you continue to pay off the same proportion of interest each month, no matter your payback method.

Best to use when: you plan on paying nothing higher than the minimum payment for the entirety of the loan.

5. Direct Financing

Direct financing is a popular option for those who like to have options. When you approach a bank, credit union, or online financing company for your auto financing, you can go into a car dealership with more power. You are not at the liberty of the car dealership to offer you financing through their channels, and you can negotiate on price knowing how much money you have to spend.

You’ll be pre-approved for a loan before you start test driving. This is also a great way to find which institution will give you the best rates.

Best to use when: you’re a bargain shopper with a propensity for freedom.

6. Indirect Financing

Indirect financing uses the car dealership itself to find financing on your behalf. If you go into the car dealership and want to buy a car immediately or are pressured into an on-the-spot purchase, financing through the dealership may be your only option.

The dealership arranges financing for the car and may add a percentage or two on top as a finder’s fee. Incentives such as rebates and zero percent interest are common incentives.

Best to use when: you are afraid of the bank.

7. In-House Financing

In-house financing allows you to buy everything in one convenient stop and is when the car dealership sells you the car and gives you an in-house loan.

Commonly referred to as ‘buy here, pay here’ dealerships, this type of loan is often much more expensive than going through traditional channels and are marketed as great deals.

8. Private Party Loans

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