Were you aware that as much as 44% of American adults rely on auto financing? The latest statistics reveal that Americans generated a record 2.5 million auto loans in the year 2018 alone.
What is auto financing?
Auto financing or car financing is the range of financial products available for a person to purchase a car. It allows people to acquire a car via various arrangements other than payment done in full cash.
This lets an individual purchase a car from a dealer or manufacturer, even if he/she doesn’t have the required amount in hand. The required credit score to get auto financing is 707, but there are other legitimate provisions to get the financing. There are both secured and unsecured financing and the Annual Percentage Rate (APR) is lower for the former. Most auto loans are secured, keeping the car as a collateral.
Types of auto financing?
If one searches the internet about the different auto financing options, he/she will most likely end up getting confused. There are numerous options to get finance for a car, even if you have a very poor credit score.
Listed below are some of the general and legitimate auto financing options available in the market.
Direct and indirect financing
In direct financing, the buyer gets auto financing directly from the lender which can be a bank, a finance company or a union. The buyer can get the loan and purchase from the dealer. This gets the buyer pre-approved before purchasing the car, making the process direct and simple.
Indirect financing involves the dealership arranging the finances from a lender. Captive lenders provide on-the-spot loans as these are financial companies connected to a specific auto-manufacturer. For example, Toyota’s Toyota finance, For Credit, Honda Financial Services, Lexus Financial Services, etc.
Secured and unsecured financing
In secured financing, the buyer gets the auto financing from a lender by keeping the car as the collateral. This means that the lender can repossess the car if the buyer fails to close the loan in time. Most car loans are secured loans.
In the case of unsecured financing, there is no problem of collateral. The financing is done solely on the buyer’s word and usually possess higher interest rates. It is not as common as secured financing.
Simple interest and pre-computed financing
Simple interest loan calculates the interest on a preset periodic basis. During each period, the interest is calculated based on the outstanding amount on loan. The borrowers who pay off their loans early get to save some money.
But precomputed finance works in a way where the interest rates are calculated before the lender and buyer signs the agreement. Unlike simple interest financing, the buyer doesn’t get to save any money even if the loan is paid off in advance as everything is pre-calculated.
Private party financing
This type of financing occurs when the buyer purchases a vehicle from an individual seller. The buyer should thoroughly check the details of the car and its background information like whether the seller has paid off the previous loan and if there is an outstanding lien on the car.
Lease buyout financing
This is a useful option for buyers who cannot pay off the remaining amount of the loan. A commercial lender steps in and pays off the remaining amount provided the buyer make regular payments to the lender.
These are the 5 five types of auto financing available. There are many other options available like new car and used car financing, in-house financing, hire purchase loans, car refinance loan, lease buyouts, among others. You can always find about them on the internet but always make sure that your judgments are not completely based on what Google tells you.
Before signing on the dotted line, you must thoroughly go through the policies of the chosen finance plan. Understand the policies and compare them with other options before picking the one that offers the best terms.