First things first, what are auto loans, or what is a loan for a car? Simply put, an auto loan lets you purchase your desired vehicle and pay its price in installments over a period of time instead of paying it up-front.

It is just like any bank loan, personal loan, or housing loan. The only difference is that it is used exclusively to purchase a vehicle.

There are many auto financing options for cars. They could be divided based on security, repayment terms, source of finance, repayment duration, and many other factors. The following are the most commonly considered types of auto loans:

Based on security

Security can be anything of value (asset) that is kept against an auto loan to guarantee the security of its repayment. Based on security, there are two types of auto loans:

1. Secured loans

• As the name suggests, these loans are secured.
• The person who obtains such a loan has to deposit a security of value, called a collateral, with the lender to guarantee the repayment of the loan.
• In a secured auto loan, the vehicle being financed serves as collateral.
• In case the borrower fails to repay the loan during the agreed time period, the lender is authorized to revoke the borrower’s ownership and sell the vehicle to recover his/her payment.

2. Unsecured loans

• Such loans do not involve any kind of security.
• The borrower is not obliged to keep any asset as collateral. Subsequently, the lender has no right to interfere with any private property of the borrower to recover his/her payment.
• Such loans are usually sanctioned for a smaller amount than secured loans.
• Lenders often charge higher interest rates on unsecured loans to make up for the risk of default involved.

Both these loan options are viable for auto financing options. The decision ultimately depends upon the needs of the borrower and the terms and conditions of the lender.

On the basis of interest

Interest rates are always a key component of any loan. Auto loans are no exception. Interest rates dictate the weight of burden which would fall on the borrower during the tenure of repayment.

On such basis, there are also two types of auto loans:

1. Simple Interest Loans

• These loans are more commonly disbursed in the world of auto lending.
• In a simple loan, the interest is charged on whatever amount of the principal is left.
• This means that as you keep making repayments, the amount of the principal decreases.
• It is a better alternative in case the borrower plans on making an early repayment as such repayments will keep on reducing the amount of principal.
• It follows the diminishing balance system of accounting.

2. Pre-computed Interest Loans

• In these kinds of loans, a fixed amount of interest is charged through fixed amounts along with instalments.
• It means that even if you make repayments in advance, that amount will go into paying off interest with the principal remaining the same.
• It follows the fixed balance (straight line) system of accounting.

A decision about the type of interest you pay on the financing options for cars should be made by carefully considering your own repayment capability, stability of income and the duration of repayment tenure etc, to avoid any future conflicts or hardships.

On the basis of the source

Auto loans can be obtained from multiple sources. Be it a bank, a non-banking financial corporation (NBFC), a credit institute, a car dealership or a private dealer. 

Such different vehicle finance options offer different features and functionality. It is up to your judgement and your needs to decide what works best for you.

According to the source of finance, further division can be made into two types of auto loans: 

1. Direct Auto Loan

• Direct auto loan involves getting an auto loan sanctioned by a bank or a credit institution.
• It allows you to have a greater degree of flexibility.
• The parent institute approving the loan will give you a choice of multiple lenders with whom they coordinate, even before you decide to select the car you want.
• These loans are more streamlined and often more economical for the borrower.

2. Indirect Auto Loan

• In case of an indirect auto loan, you will have to contact a car dealership for the auto loan.
• Such car dealerships have a wide network of independent car dealers. They will assess your profile and requirements and link you up with one of their dealers.
• The terms and conditions of the auto loan are, in most cases, finalized by the car dealership itself, and both the borrower and the independent dealers have to comply with these terms.

What Types of Auto Loans are Right For Me?

Many First time car buyers often consider direct financing to be a safer alternative just due to the presence of a formal institution in the process. However, that bias shouldn’t influence your decision. Go for the auto financing options that suit your requirements the best.

This blog will help you know more about the options available to you during your car financing journey. 

• Am I buying a high-end or a budget car?
• What portion of my income can I devote to paying off the installments?
• How long will I need to pay back the auto loan in its entirety?
• Do I want flexibility or a defined structure in my financing plan?

These are some key questions to ask yourself before making a decision. On top of this, do remember that nothing and nobody will give you better advice than your gut.

Even after you’ve studied, pondered, and deliberated over all the facts and figures, make sure you listen to your instincts before finalizing your decision.

Still on the fence about what kind of vehicle finance options should you go for? 

No need to worry. The experts at AutoFinancingPro are committed to clearing your doubts and making your car financing journey as smooth and as confusion-free as possible. Book a consultation with the team today to get started on your path to car ownership.