6 types of auto loans explained: which is right for you?

Auto loans are useful for buying a car, buying out your lease, or refinancing an ex🎉isting auto loan.

With six types of auto loans available, you can find one that meets your needs.ꦬ Be caꦐreful, though, not to take on more debt than you can afford. Some lenders will take your car away if you can’t make your payments.

Since every lender has different requirements, you’ll want to compare s✨everal to find the best match for your needs. Below, learn more about the different types of auto loans and how to findꦚ the right one for you.

• 6 common types of auto loans
• Difference between secured, unsecured loans
• Direct auto financing vs. indirect financing
• How to apply for an auto loan

6 common types of auto loans

Auto loans are available to suit every type of car buyer, financial situation, and credit score. If you want to finance your car instead of paying cash, you’ll most likely use one of the six tyꦕpes of auto loans below.

1. First-time car buyer loans

Good for: Buyers with no credit history

It can be hard to get approval for a🔥 car loan if you have little or no credit, because lenders can’t tell if you’ll repay your loan. In this situation, first-time car buyer loans can help. These loans might co🔯me with a higher interest rate, but they let you build your credit history over time (assuming you keep up with the payments). 

Check with dealers that specialize in first-tim🎃e car buyer loans, or leverage the relationship you have with your bank and ask about available loan options. 

2. Used-car loan

Good for: Choosing older-model cars

Previously owned cars can be less expensive than new ones. But many lenders don’t want to risk loans for older vehicles, which are more likely to break down and need repairs (though there are auto repair loans). 

One way to save money is to buy a used car through a private sale using funds from a personal loan. You may be able to get a good interest rate on the loan and still have your choice of vehicle. Just make sure the l🔥ender you select allows for car purchases from loan funds.

3. New-car loan

Good for: Lower rates than used-car loans

New-car loans are probably the most well-known way to finance a car. You can get a new car loan from the dealership, or you can use a bank, credit union, 🎀or online lender. You’ll repay the loan in fixed installments, with terms usually between two and eight years.&n😼bsp;

Typically, you’ll find lower rates on 🤪new-car loans than on used-car loans. The best rates for these new-car loans are reserved for borrowers boasting excellent credit.

4. Lease-buyout loan

Good for: Avoiding lease overages

When an auto lease is up, you’re supposed to return the car. But if you love your car too much to turn it in — or if you want the o👍ption to sell it later — a lease-buyout lꦬoan can help. 

This kind of loan lets you finance the purchase of your 🐻leased car, using the vehicle as collateral. Not every lender offers lease-buyout loans, s𓄧o you may have to dig a little to find the right fit.

5. Auto refinancing loan

Good for: Making room in your budget

An auto refinancing loan replaces your ཧexisting loan with a new one from a different lender. This type o🍃f loan is a great way to get a lower interest rate and different repayment terms.

However, refinancing can cost🐷 𒁏you more in interest if you’re not careful. It’s important to run the numbers comparing the current loan to the new loan to make sure you’re getting a good deal.

6. Auto loans for bad credit

Good for: People who struggle to get approved elsewhere

Cer🤡tain online lenders and some dealerships specialize in bad-cred𓆏it loans. Expect to pay higher interest rates on these types of loans, though. It’s important to keep up with your payments, or you risk losing your vehicle. Take extra time to check out your loan agreement, and don’t sign anything that doesn’t look right.

Difference between secured and unsecured auto loans

With a secured auto loan, you’ll use your car as collateral. In other words, you promise to turn over your car if you fail to repay. With an unsecured loan🧜, you don’t need to risk any of your assets — yoܫu just need to honor your loan agreement and make payments on time.

Secured auto loans

Secured auto loans are common. When you use a secured loan to purchase a car, you don’t get to hold theꩲ title until you’ve repaid the entire loan. Only then is the vehicle officially yours. Secured auto loans often come with lower interest rates than unsecured loans, making them a popular choice for car buyers.

Unsecured auto loans

With unsecured auto loans, you don’t use your car as collateral. Instead, these loans work like a personal loan. You sign a loan agreement, promising to repay the full amꦫount with interest. 

🌟If you fail to repay, the lender can’t take your car because you didn’t use the title as collateral. Since that makes it riskier for the lender, they’re more likely to charge higher interest rates on unsecured loans, and they may require a higher credit score to qualify.

Direct auto financing vs. indirect financing

Direct auto financing means you borrow directly from a bank, credit🥂 union, or online lender. Indirect financing lets you get your loan options from a third party — usually♕ a car dealer.

Direct auto financing

Direct auto f🌸inancing involves no middleman — you simply contact your lender of choice and apply for the loan. Direct auto financing may help you get a lower interest rate, too, because you’re dealing directly with the bank, cred෴it union, or online lender.

Indirect auto financing

If you prefer, you can let your car dealer arrange financing between you and a third-party lender. When you’re ready to buy a car, the dealer collects details from several prospective lenders and presents you with a selected loan o🍌ption. Although indirect financing is convenient, the interestไ rate is often higher than with direct financing.

How to apply for an auto loan

Apply for an auto loan using these eight steps:

1. Check your credit report. Knowing your credit score helps you decide which lenders to check out.
2. Find several lenders to compare. Look over rates, terms, and whether they require collateral.
3. Get prequalified. Prequalifying lets you check your rate before you apply. It also shows lenders that you’re loan-ready.
4. Decide how much you’ll put down. The bigger the down payment, the less you’ll need to finance, and the more you’ll save on interest.
5. Shop for the car. Your budget will determine the types of vehicles you can afford.
6. Review your loan options. Once you’ve settled on a car, check the financing options offered by the dealer, and compare them to your other choices.
7. Finalize your purchase. Complete the loan documents and make any “day-of” payments, including your down payment and any fees. 
8. Pay your loan. Note when your first payment is due, and make sure to pay on time every month. (Regular, timely payments are reported to the credit bureaus and help bolster your credit rating.)

While you’re applying for an auto loan, pay attention to t𒆙he following factors, wh🍎ich can make a big difference in how much you’ll pay:

• Interest rate and APR: The interest rate is how much the lender will charge you for the loan, expressed as a percentage of the loan amount. The annual percentage rate (APR) tells you the yearly cost of borrowing that money and includes the interest, fees, and other charges. Higher rates make a loan more expensive.
• Credit score: Your credit score tells your lender how responsible you’ve been with credit. They use that score (along with information about your income and debts) to determine whether they want to lend you money. To learn your credit score, request your free credit report from If you find errors on your credit reports, take steps to correct them, as they can reduce your score.
• Prequalification and pre-approval: Getting prequalified and getting pre-approved are two different things — and neither one guarantees you’ll get the loan. When you prequalify for an auto loan, you see what your rate and payment terms could be. Getting pre-approved usually means the lender must run a hard credit inquiry.

• Loan term: Auto loans typically carry terms of three to five years, but more lenders are now offering loans up to eight years. But keep in mind that longer-term loans usually come with higher interest rates, which will increase the overall cost to borrow. Even a long-term loan with a lower interest rate will cost more than a short term loan with the same rate because you’ll be paying interest for an extended period. When borrowing, the shorter the loan term, the better.

Getting the righ💟t loan will save you money, so it’s worth shopping around. Comparing lenders gives you the information you need to make an informed decision and get a great deal, no matter what car you buy.