Types of Auto Loans

Consumers have a variety of options when seeking auto loans. It's important to consider all potential financing methods prior to signing a loan. Among the different types of auto loans available to car buyers are pre-computed loans, simple interest loans, auto equity loans, lease buyout loans, and car title loans. The best loan must fit with a borrower's financial goals and budget.

Pre-Computed Loan

The pre-computed loan, which is the most common, is a standard principal and interest loan. Before a borrower and lender agree and sign the financial paperwork, the interest and principal payments are "pre-computed," or pre-calculated. Once you sign, you'll need to repay every dollar owed in the contract.

Simple Interest Loan

Simple interest loans are for financially savvy customers. These loans calculate interest on a daily basis based on the outstanding balance of the loan, much like a credit card. Customers can save on interest payments by paying more than their standard monthly payments. Another way to reduce interest payments is to make biweekly payments--this will ensure 26 half-payments a year (13 full payments instead of 12).

Car Equity Loans

Equity car loans are normally for short-term loans. In most cases, a lender will not secure a car equity loan if there is currently a lien on the car. Guidelines vary from lender to lender, but in almost all cases, you'll be unable to borrow up to 100 percent of the vehicle's value. Cars rapidly depreciate, unlike properties, and therefore banks like to mitigate their risk with lower loan amounts.

Lease Buyout Loans

Lease buyout loans are just what they seem--loans used to purchase a car that was being leased. These loans are often financed through the dealership where a lease was obtained. In many cases, leasing dealerships do not allow other finance companies to buy out their leases. Be prepared for your payments to increase substantially if you buy out a lease.

Auto Title Loans

Auto title loans are a relatively new car loan product. These loans are made by small finance companies that make you surrender your car title prior to obtaining loan proceeds. These businesses have come under legal and congressional scrutiny; tread carefully before obtaining a car title loan.