What Are the Different Types of Car Loans?

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When shopping for a car, there are several types of car loans you can choose from, including secured or unsecured, direct or indirect and simple-interest or precomputed-interest loans. Understanding how each type of auto loan works and their pros and cons can help you select the best financing for your needs.

Secured vs. Unsecured Car Loans

Auto loans can be secured, meaning the car itself serves as collateral, or unsecured, meaning there is no collateral. Secured auto loans are more common, but sometimes an unsecured loan may make more sense.

Secured Car Loans

Secured car loans use the vehicle you're financing as collateral for the loan. If you don't make your payments, the lender can repossess the car. Because secured loans are less risky for the lender, secured auto loans are generally easier to get and have lower interest rates than unsecured car loans.

ProsCons
Typically easier to get than unsecured loansRequires comprehensive/collision insurance on car
Often offer lower interest rate than unsecured loansDown payment required to get best terms
Dealerships may offer special financingCar can be repossessed if you don't pay
Interest may be tax deductibleNot always an option for used cars or private party sales

Unsecured Car Loans

Unsecured auto loans are personal loans that you use to buy a car. Unsecured loans don't require collateral, so they're usually harder to get and have higher interest rates than secured auto loans.

Lenders can't repossess the car if you stop making payments on an unsecured loan. However, they can report missed payments or defaults to the major consumer credit bureaus (Experian, TransUnion and Equifax), damaging your credit score. They might also send your account to collections or sue you.

ProsCons
No down payment requiredTypically harder to get than secured loans
No car insurance requirementsMay have higher interest rate than secured loans
Can be good option for used car or private party salesInterest isn't tax deductible
Car can't be repossessedYour credit score suffers if you don't pay the loan
Can use money for other purposes

Learn more: Personal Loan vs. Auto Loan: How Should You Finance a Car?

Simple Interest vs. Precomputed Interest Car Loans

Most auto loans use simple interest, but some use precomputed interest. The way interest on your auto loan is calculated can impact your total cost, so it's important to know the difference.

Simple Interest Car Loans

Simple interest car loans calculate the interest you owe either daily or monthly based on your outstanding loan balance, not on the original loan amount. Most auto loans use simple interest, also known as loan amortization.

With a simple interest loan, making extra payments towards your loan principal reduces your loan balance, which reduces the amount of interest you owe. If you think you might pay your loan off early, or want the option to make extra principal payments each month, you'll want to get a simple interest loan.

ProsCons
Early loan payoff or extra principal payments reduce the total interest you oweSome lenders charge prepayment penalties for paying off your loan early

Learn more: How to Pay Less Interest on a Car Loan

Precomputed Interest Car Loans

With a precomputed interest auto loan, the total interest you'll owe is calculated at the time you get the loan, with interest amounts allocated to each monthly payment. Interest payments are higher at the beginning of the loan term and gradually decrease, which looks a lot like a simple interest loan. But because interest is precomputed from the beginning based on your total loan amount, reducing your loan principal won't reduce the interest you owe.

Precomputed interest car loans aren't as common as simple interest loans and are most often offered to borrowers with poor credit. If you stick to your regular payment schedule, you'll pay the same total interest for a precomputed interest auto loan as you would for the same size simple interest auto loan with the same interest rate and terms. You just won't have the flexibility to save money by making extra payments.

ProsCons
Paying off loan early may save money if lender refunds some interestPaying off loan early won't save as much as with simple interest loan
If you stick to payment schedule, there's no difference in total interest compared to simple interest loanMaking extra principal payments won't reduce interest

Learn more: Should You Make Extra Principal Payments on a Car Loan?

Direct vs. Indirect Car Loan Financing

You can finance a car by working directly with a bank, credit union or online lender, or indirectly, by having the auto dealership serve as a middleman to match you with a lender.

Direct Car Loan Financing

Direct auto loan financing means you apply for an auto loan directly with a bank, online lender or credit union. This lets you compare interest rates from various lenders, apply for the loan with the best terms and get preapproved. A preapproval letter locks in your interest rate for 30 to 60 days and shows the loan amount you're conditionally approved for, which can give you more leverage at the dealership.

ProsCons
May save you money on interestNot always the best interest rate
You have greater control over loan offersCan be time-consuming
Gives you more negotiating powerSome lenders limit you to dealers in their network
Available for private party auto purchases

Learn more: How to Get Preapproved for a Car Loan

Indirect Car Loan Financing

With indirect auto loan financing, you apply for an auto loan at the dealership. The dealer submits your credit application to multiple lenders. You'll then compare these dealer-arranged offers to choose the best loan.

In addition to dealer-arranged financing, auto dealers may also offer captive financing through the manufacturer's financing company. This is typically where you'll find special financing offers like 0% annual percentage rate (APR) auto loans.

ProsCons
More convenientNo control over lender options
Promotional financing may offer lower rates than direct financingCan cost more than direct financing if dealer takes a cut of the interest
May be better for borrowers with bad creditNot an option for private party auto purchases

Tip: You can boost your bargaining power by getting preapproval from a direct lender before visiting the dealership and asking if the dealer can beat that offer.

Special Types of Car Loans

There are some special types of car loans you may want to consider.

  • Military car loans: Auto dealers sometimes offer military service members special financing, or discounts and rebates that can reduce the amount you need to borrow. Credit unions catering to service members can also be a source of low-interest auto loans.
  • Buy here, pay here (BHPH) car loans: Catering to buyers with bad credit or no credit, BHPH auto loans are in-house loans from dealerships. They typically don't require a credit check but usually have higher interest rates than other types of auto loans and may require biweekly or weekly payments.
  • Private party auto loans: You can get a private party car loan to buy a car from an individual by applying to banks, credit unions and online lenders. Private party auto loans typically cover only the cost of the car, not registration fees, sales taxes and other one-time expenses, so you'll need to cover those costs yourself.
  • Auto lease buyout loans: You can use an auto lease buyout loan to purchase your leased car when the lease is up. Auto lease buyout loans are available from your lessor or from banks, credit unions and online lenders.
  • Auto loan refinance: You might want to refinance your existing auto loan, replacing it with a new loan, if you can get a lower interest rate or want to lower your monthly payment.
  • Cash-out auto loan refinance: You can tap the equity in your vehicle by replacing your current auto loan with a larger loan, ideally at a lower interest rate, and keeping the extra cash.
  • Car title loans: If your car is paid off or close to it, you can use it as collateral to borrow cash quickly. But with APRs of 300% or more and repayment terms as short as 15 days, title loans are risky: The Consumer Financial Protection Bureau (CFPB) reports 20% of title loan borrowers ultimately have their cars repossessed.

How to Choose a Car Loan

Follow these steps to choose the best car loan for you.

  1. Know your credit score. Checking your credit report and credit score can give you an idea of the types of auto loans that may be a fit. Taking time to improve your credit score before applying for an auto loan may help you get a lower interest rate.
  2. Get preapproved. To shop for the best loan, get preapproved with several lenders. You can minimize any negative impact on your credit scores by keeping your rate shopping within a 14-day window.
  3. Compare loan offers. You can use Experian's car payment calculator to evaluate various loan offers, including loan amounts, interest rates and repayment terms.
  4. Know the total cost. In addition to interest rates, consider a loan's APR. This reflects the total cost of borrowing money, including interest and fees.

Tip: If you can't get the auto loan you want on your own, enlisting a cosigner who has good credit could help you qualify for a lower interest rate and more favorable terms.

Frequently Asked Questions

There isn't a minimum credit score needed for an auto loan; each lender has their own criteria, and some lenders cater to borrowers with bad credit or no credit. However, you're more likely to qualify for lower interest rates if you have a FICO® ScoreΘ of 670 or more or a VantageScore® credit score of 661 or higher. For example, the average new car loan interest rate is 5.18% for a buyer with an excellent credit score, compared to 15.81% for a buyer with poor credit scores, according to Experian data from the first quarter (Q1) of 2025.

What's considered a good interest rate for an auto loan isn't the same for everyone. A borrower with better credit can typically qualify for a better interest rate than one with poor credit, for example. Interest rates can also vary depending on factors such as your down payment. On average, the interest rate on a new car loan is 6.73%, but average rates range from 5.18% for borrowers with excellent credit to 15.81% for borrowers with poor credit, according to Experian Q1 2025 data.

Learn more: How to Get the Best Car Loan

You usually need to have paid off your car to get a title loan, but some lenders offer title loans on financed cars if you have enough equity in the car to meet their criteria. The title lender will work with the original lender to pay off your existing auto loan; that amount is then added to your title loan. For instance, if you owe $2,000 on your financed car and want to borrow $1,000, your title loan would be for $3,000.

Learn more: What Does It Mean to Have Equity In Your Car?

The Bottom Line

No matter what type of auto loan you've set your sights on, making a bigger down payment or opting for a shorter loan term could help you qualify for a lower interest rate. Shaping up your credit before you start shopping for loans is another smart move. Actions such as paying all your bills on time and paying down debt to reduce your credit utilization ratio can help improve your credit score, which could make you eligible for a lower-interest auto loan.

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About the author

Karen Axelton specializes in writing about business and entrepreneurship. She has created content for companies including American Express, Bank of America, MetLife, Amazon, Cox Media, Intel, Intuit, Microsoft and Xerox.

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