There’s something awesome about cruising down the street in your new car as the wind brushes through your hair. You feel like life has taken on a new meaning. The bottom line is that owning a car is at the top of most people’s list.
The reality is that most people don’t pay for their cars out of pocket. This is because there are numerous financial institutions that are ready and willing to give you a loan. Statistics show that car loans are one of the biggest forms of debt in America, right after student loans and house mortgages.
But before you run out and purchase a new car on credit, it’s probably a good idea that you first understand the different types of car loans available in the market.
Here are six types of car loans:
Secured Car Loan
A secured loan is the most common type of car loan. The lender gives you a loan that is secured by the car you are going to buy. The vehicle title states that the lender is the lienholder. This means that the car acts as collateral, and thus the lender has the right to repossess the vehicle in case you default on your payments.
Unsecured Car Loan
There are some financial lenders who offer car loans that do not have any security interest. This means the vehicle you are buying cannot be used as collateral and the lender simply relies on your promise to pay back the money. Since the lender carries a lot of risk in such a deal, unsecured loans are uncommon and often charge a very high interest rate. You can find car buying tips and more from Car Buying Strategies.
There are some organizations that offer their employees a car loan as part of their perks. The company then takes a part of the employee’s salary to pay back the loan. This is what is known as a novated lease. It usually involves the employer, employee, and the car provider. Unfortunately, the employee must carry all the operating costs of the vehicle, such as maintenance and insurance.
This is where a financier buys a vehicle and then allows you to rent it. This means that the car belongs to the lender instead of you. However, you don’t have to worry about costs such as insurance or maintenance. At the end of the set period, you can choose to buy it or trade in the old car in for a new one.
Commercial Hire Purchase
This is where a financial lender purchases a vehicle and then hires it out to you for a specific period of time. During this period, you must pay back the loan used to buy the vehicle. Once you have cleared the loan, the car then belongs to you.
In some instances, a car dealer may request a lender to give a car buyer a loan. Since the dealer is acting as a middleman, they may add their own interest rate percentage on top of that offered by the lender.
When shopping for a new car, it’s important that you know the type of car loan that is best for you. Don’t be in a rush to get the car. Take your time and compare the rates offered by different lenders and auto loan companies. This will save you a lot of money.