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What are the different types of car loans?

What are the different types of car loans?

When you’re buying a car, you’ll likely want to have your finances in place before you go looking for your new wheels. If you don’t have the funds saved, you may need a car loan, so you’ll have to choose the loan that best suits your purpose and find a lender that offers it at competitive rates. 

There are multiple types of car loans, which means you need to choose the right loan type for your circumstances. The type of car loan you choose will affect the amount of interest you pay, how much you can borrow, and the loan term. To help make an informed decision, you should understand the different types of car loans. 

Secured loan vs unsecured loan 

In a secured loan, an asset, such as your car, is used as security by the lender. If you default on the loan, the lender can recoup the funds they lent you by selling the vehicle. This reduces the risk to the lender, so most lenders charge lower interest rates for a secured loan. There are a range of lenders in the market that will offer you a secured loan to buy your car.

On the other hand, an unsecured loan does not require collateral. Therefore, if you default the lender has no security to help them recoup the costs. To help lenders lower their risk, they’ll offer unsecured loans with higher interest rates, assuming you can comfortably repay the loan if you’re willing to pay the higher rates. 

Fixed or variable interest rate loans

Another factor that will come into your decision making is whether you want a fixed or variable interest rate. Both secured and unsecured loans can have fixed or variable interest rates. You should also check any other fees or charges that come with the loan. 

A fixed interest rate loan means you’ll have a consistent and fixed monthly payment amount. Fixed interest rates may fit well for anyone who has a set budget and doesn’t want any changes in repayment amount. 

A variable interest rate loan means your repayments could change if the lender chooses to change the interest rate. You could benefit from being on a variable rate loan if interest rates are decreased. On the other hand, you also run the risk of interest rates increasing and your loan repayment increasing. 

Make sure to compare different car loan options from different lenders looking at both fixed and variable rates to find the right loan for you.

Personal loans

A personal loan is an unsecured loan that you get from a lender with no security offered. It works the same as an unsecured car loan, where you pay back the borrowed money plus interest, but the funds don’t have to be used for a car if you don’t want to. As with any other unsecured loan, the interest rates are often higher than a secured loan. 

A personal loan may be suitable for you if you want funds for a car and also need some extra funds for other purposes.

Used car loan vs new car loan

Getting a loan on a new car vs a used car can be different in many aspects. 

A loan to buy a new car may have a lower interest rate than a loan to buy a used car, as a newer car is more likely to retain more of its value and less likely to break down to the point of needing to be written off. On the other hand, new cars are generally more expensive than used cars, so you may need a larger car loan. Plus, some lenders may limit new car loans to particular makes and models, as well as imposing age limits on the vehicle you buy.

Used car loans are more lightly to have higher interest rates, as a used car is more likely to break down and less likely to retain enough value to secure a loan. However, there are likely to be fewer restrictions on the type of vehicle you can purchase with a used car loan, and you may not need to borrow as much money to buy a used car. 

Peer to peer loans 

By now, you may be familiar with the strict eligibility criteria of traditional lenders like banks. However, other options are available if you want to look outside the traditional lending options. 

One of these options is private lenders that offer peer-to-peer loans. These loans can often have the same fast approval and flexible terms as traditional lenders. They may offer competitive interest rates and flexible loan options depending on your income, risk profile, and other factors. 

Peer-to-peer financers also provide different car loans, like secured loans, unsecured loans, or loans with variable interest rates. This loan type doesn’t involve an intermediary institution between a lender and the loan applicant. 

Car dealer finance 

Rather than obtaining car finance from a lender, you may be able to look at financing your car purchase through the dealer. 

Car dealer finance is when the car’s dealer organises loan finance for your purchase. They often have partnerships or deals with lenders, and because they’re likely to bring a lot of business in for these lenders, you may be able to benefit from competitive interest rates or other special features. Keep in mind that going directly to the dealer for car finance could also mean missing out on competitive offers from other lenders. 

Understanding the different types of loans for cars will help you when you’re looking to finance the purchase of a new or used car. Make sure you do your research, compare different loans and make a conscious decision before signing a contract for a car loan. 

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.

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