What is Car Loan and What are Different Types of Car Loans?

What is Car Loan and it's Different Types

Purchasing a vehicle is a big decision which comes with a big expense, often necessitating financing. But, while buyers pay close attention to researching potential cars which they can purchase to fulfill their requirements, they forget to put in equal efforts into finding the right financing option. This leads them to make uninformed decisions based on limited knowledge, often meaning that they do not get the best deals. In order to ensure you get the best car loan deal, understanding some basis is vital. In this article, we explain just that.


What Is A Car Loan

As the name indicates, a car loan is a specific type of loan created for individuals who are looking to purchase a vehicle. It is also known as an auto loan. This type of loan is usually a fixed loan which is given for a specific amount of time at a fixed rate of interest. However, the loan term can be extended in some cases.

The particular details of every car loan varies based on a number of factors pertaining to the loan requirement and the borrower. Every borrower is offered different terms for the loan contract in accordance with factors such as the loan amount needed, the borrower’s creditworthiness, and income range, among others.


Types of Car Loans

Different types of car loans can be chosen by different borrowers as per their unique needs. These can also be variously offered by the lending company depending upon the background and credit history of each individual borrower, as well as the amount of loan that they are seeking. Typically, there are only two kinds of car loans including secured and unsecured car loans.

However, different lending authorities, such as banks, credit unions, and online lenders can also offer other types of auto loans like simple interest car loans, title loans, lease loans, loans for second-hand cars, loans for individuals with bad credit, and so on.

Also read: Can I Use a Personal Loan to Buy a Car?

These specialized kinds of loans will usually fall under either the secured loan category or unsecured loan category.

So what are secured and unsecured car loans, and how do they differ from each other?

  • Secured Car Loans: A secured car loan is one for which the borrower of the loan puts forward a lien or asset down as collateral. The term secured means that in case the borrower is a defaulter, then the lending company has the right to sell off, repossess, or seize the collateral to make up for the remaining loan amount. Since the interest of the lenders is safe because they hold the collateral with them, this loan is known as a secured loan.

For this type of a loan, the collateral is generally the vehicle itself for which the loan is being taken. However, some lenders may allow or even demand some other object to be provided as collateral. Which objects qualify to be the collateral depends on each individual case.

An important aspect of these loans is that since they do not carry as much risk for the lenders, they are usually offered at lower rates of interest. Nevertheless, it must be noted that the actual rate of interest will depend upon a number of factors and not the collateral alone.

  • Unsecured Loans: Another common type of car loan which a borrower can choose is an unsecured car loan. As must be evident from its name, this type of loan does not require collateral to be provided in order for the loan to be approved. This means that in case the borrower ends up defaulting on the loan, the lender risks losing his investment. 

Because the interest of the lender is not safeguarded by the terms of this loan, it is known as an unsecured loan. Additionally, these loans come with a higher risk for the lender, because of which they also come with higher rates of interest as compared to a secured loan. This means that the borrower’s monthly payments and overall payment to be made to the lender increases significantly.

However, in the event the borrower is unable to fulfill his repayments, they do not risk losing the collateral. However, defaulting will impact their credit score and background, which means that they will certainly have more trouble in getting any loans in the future.


How To Choose The Right Loan Option

When trying to determine which type of car loan you must get to buy your vehicle, there are a number of factors which you must consider. Most importantly, it is critical to assess a number of loaning options such as bank loans, loans from credit unions, and loans from online lenders to find the best deals. Moreover, it is vital to compare multiple lenders to get the best quote.

When availing a car loan, there is no standard offering which is suitable to everyone. Every borrower’s financial situation is different, which should be the primary consideration when choosing the right loan option.

Some of the factors which you must consider before finalizing the loan include the following:

  • Rate of interest that different lenders are offering.
  • How much amount you need to finance your vehicle.
  • If there are down payment requirements in order to secure the loan, find out how much that is.
  • What is the duration of the loan term being offered and does that suit your financial goals? Check to see if the lenders are willing to increase or minimize the loan duration based on your capacity to repay and your financial objectives.
  • How much are the monthly payments which you need to make, and whether or not you can fulfill the requirement every month.
  • Find out if there are any policies regarding early payments, whether it is allowed or not, and whether the lending company will impose a penalty for it.



Getting an auto loan is a little time-consuming, however, it will last a few years, which makes it critical to find out what is the best option for you. A thorough research will help you land a good deal that not only helps you get the vehicle, but also contributed towards your financial future goals.