Types of Auto Loan
There are five main categories of auto loans, which can be organized based on the loan's structure, repayment terms, and borrower requirements.
Main Categories
- Simple Interest Loan — a loan where interest is calculated as a percentage of the initial loan amount, distinguishing characteristics include fixed interest rates and equal monthly payments, with Ford Motor Credit Company being a notable example of a lender offering this type of loan.
- Precomputed Interest Loan — a loan where the total interest is calculated and added to the loan principal at the beginning of the loan term, distinguishing characteristics include the borrower paying interest on the entire loan amount, even if they pay off the loan early, with GM Financial being a lender that offers this type of loan.
- Secured Loan — a loan where the borrower provides collateral, typically the vehicle being purchased, to secure the loan, distinguishing characteristics include lower interest rates and stricter repayment terms, with Toyota Financial Services being a notable example of a lender offering this type of loan.
- Unsecured Loan — a loan where the borrower does not provide collateral, distinguishing characteristics include higher interest rates and less stringent repayment terms, with Capital One being a lender that offers this type of loan.
- Lease Buyout Loan — a loan used to purchase a vehicle at the end of a lease, distinguishing characteristics include the loan being secured by the vehicle and the borrower having already paid a significant portion of the vehicle's value through lease payments, with BMW Financial Services being a notable example of a lender offering this type of loan.
Comparison Table
| Loan Type | Interest Rate | Repayment Term | Risk |
|---|---|---|---|
| Simple Interest Loan | Fixed, 5-7% (Bankrate) | 3-5 years | Low |
| Precomputed Interest Loan | Fixed, 6-8% (NerdWallet) | 4-6 years | Medium |
| Secured Loan | Fixed, 4-6% (US Bank) | 5-7 years | Low |
| Unsecured Loan | Variable, 8-12% (LendingTree) | 3-5 years | High |
| Lease Buyout Loan | Fixed, 5-7% (Edmunds) | 2-4 years | Low |
How They Relate
The categories of auto loans often overlap, with Simple Interest Loans and Precomputed Interest Loans being commonly confused due to their similar structures, but differing interest calculations. Secured Loans and Unsecured Loans are distinct due to the presence or absence of collateral, but may have similar repayment terms. Lease Buyout Loans are a specialized type of loan that combines elements of Secured Loans and Simple Interest Loans, with the added complexity of being tied to a lease agreement. Notably, Secured Loans and Unsecured Loans can be used in conjunction with each other, as some lenders may offer a Secured Loan with an Unsecured Loan component to cover additional costs. Additionally, Simple Interest Loans and Precomputed Interest Loans can be compared in terms of their interest calculations, with Simple Interest Loans generally being more beneficial to borrowers who plan to pay off their loans early.