In much the same way as a home loan, an auto loan is offered to consumers who wish to invest in the purchase of a new vehicle or refinance an old one. Auto loans are, in comparison, much shorter in duration than home loans, often in correspondence with the average life of the vehicle in question.
An auto loan is a secured loan, meaning that the vehicle purchased by the consumer serves as collateral on the debt. If the borrower fails to adhere to the terms of the loan and keep up with payments, the lender can then seize the vehicle as payment. Auto loans can run anywhere from two years up to eight years, with five years as a popular length in that it limits the amount of interest to a manageable level.
“An auto loan is a secured loan, meaning that the vehicle purchased by the consumer serves as collateral on the debt.”
What are the types of auto loan?
There are two main types of auto loan, known commonly as direct and indirect. Direct loans is where the money is lent directly to a consumer, whereas indirect loans are carried out through an intermediary such as a car dealership. There are however, many types of auto loan that exist within this grey area between direct and indirect, many tailored to suit the needs of a specific group of consumers:
- Student Car Loan
- Jumbo Car Loan
- No Money Down Car Loan
- Classic Car Loan
- Blank Check Auto Loan
As described above, direct auto loans are those acquired by a consumer without the use of an intermediary: so, through a bank, finance company or credit union. The consumer agrees to pay, over a preset period of time, the amount financed in order to purchase the vehicle plus a finance change. The consumer then uses the loan supplied by the direct lender to pay for the vehicle.
What are the advantages of auto loans?
The main advantage of direct auto loans is that the terms of the loan are not stipulated by the dealership, who many have their own interest, but by the source of the loan – the bank or institution. As such, a consumer may first shop around for the right auto loan and select terms that suit their specific situation before committing to buy a specific vehicle. They may also have an existing relationship with said bank or institution that will allow benefits depending on their credit history. Once agreeing on credit terms, the consumer can then shop around for the car that suits them, without being tied to one dealership.
Direct or indirect auto loans?
Indirect auto loans, also known as dealership financing, is when one goes through the dealer to the financial institution or credit union. Once a consumer decides on a vehicle that suits them, they then enter into discussions with the dealership over a payment plan that also suits their financial situation. The dealer may retain the contract, but typically sells it to their own affiliated bank or credit union (assignee) that will then take on the account and be responsible for collecting payments.
Dealerships will often work with a number of these financial institutions in order to find a loan that works for you, but in reality the consumer will be limited to these few options rather than wealth of banks and institutions that may be considered through for a direct auto loan.
On the other hand, one of the main advantages of indirect auto loans or dealership financing is that it allows a certain level of convenience that direct lending does not. Financing is provided in one specific location and with extended hours that may be more convenient to the borrower. Other than multiple financing options that are based on the vehicle in question, dealers also sometimes offer low rates or incentive programs to prospective buyers – specifically, those sponsored by certain manufacturers.
Another option that buyers may consider, and an option that has become more and more popular in recent years with the rising cost of cars, is leasing. These days, almost 30% of new car purchases are made through leasing. While both leasing and buying involve a down payment and specific payments over time, the difference is that at the end of a lease the consumer does not technically own the car. They are then provided with the option of buying the vehicle or beginning a new lease. Leases typically have lower initial rates than one could expect from a regular auto loan.