12 Types of Auto Loans

With rising vehicle prices, many people use auto loans to make car buying more affordable. Whether you’re looking for a loan through a bank, credit union, or online lender, understanding the types available can help you find the best fit for your budget and goals.

This guide covers the main types of auto loans and offers tips on choosing the right one for your needs.

3 variations of auto loans

The three common variations of most auto loans are:

1. Secured vs. unsecured
2. Direct vs. indirect
3. Simple vs. computed interest

Knowing how they work can help you compare loan options. 

Variation 1: Secure vs. unsecured

• Secured loans: With a secured loan, your car acts as collateral, reducing the lender’s risk and often resulting in a lower interest rate. Most auto loans are secured, and lenders may require comprehensive and collision insurance to protect their collateral.
• Unsecured loans: Unsecured personal loans don’t require collateral, so your car won’t be at risk if you miss payments. However, these loans typically have higher interest rates and may require strong credit to qualify.

• Secured loans are best for borrowers seeking a straightforward auto loan at a lower rate.
• Unsecured loans are best for those with strong credit seeking more flexibility.

Variation 2: Direct vs. indirect financing

• Direct financing: Applying directly with a bank, credit union, or online lender allows you to compare rates and choose a loan that fits your needs. This option offers flexibility, and you can also use the loan for private sales.
• Indirect financing: With indirect financing, you apply for financing at the dealership when you’re ready to buy. This is a convenient, streamlined option, though dealerships often work with a limited selection of lenders, which may mean higher rates.

• Direct financing is best for borrowers interested in flexibility and control over their financing options.
• Indirect financing is best for those seeking convenient, time-saving financing.

If you have time to research and have good to excellent credit, I strongly suggest going with a direct loan.

However, if the situation is urgent, and you don’t have the time or credit required for a direct loan, an indirect loan may be the best option. Ultimately, it depends on your circumstances.

Erin Kinkade, CFP®

Variation 3: Simple vs. computed interest

• Simple interest loans: With a simple interest loan, interest is calculated based on your outstanding loan balance. Paying early or adding extra toward the principal reduces interest over time. These loans are widely available and can help borrowers save on interest.
• Precomputed interest loans: In a precomputed interest loan, the lender calculates total interest upfront and divides it evenly over the loan term. This means you pay the same interest amount each month, regardless of early payments. Precomputed interest loans are more common at “buy here, pay here” dealerships for those with low credit scores.

• Simple interest is best for borrowers who want to pay less interest.
• Computed interest may be best for those with poor credit and few options.

The 12 different types of auto loans

Auto loans come in various types, each with unique features to fit different needs and budgets. While most auto loans involve monthly payments to your lender, how these loans are structured can vary. Check out the table below to dive deeper into each loan type and find the one that best suits your situation.

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Tip

Loan structures differ by lender, so it’s essential to understand how a lender structures its loans before you apply.

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Loan type	What it is
New	Generally secured, might be direct or indirect, generally simple interest
Used	Generally secured, might be direct or indirect, generally simple interest
Auto refinance	Generally secured, direct, generally simple interest
Cash-out refinance	Generally secured, direct, generally simple interest
Private party	Generally secured, direct, generally simple interest
Lease buyout	Secured, might be direct or indirect, generally simple interest
Bad credit	Secured, generally indirect, generally computed interest
First-time car buyer	Generally secured, might be direct or indirect, generally simple interest
Title	Secured, direct, generally simple interest
Military	Generally secured, might be direct or indirect, generally simple interest
Business fleet	Generally secured, might be direct or indirect, generally simple interest
Classic car	Generally secured, direct, generally simple interest

New car

You can use a traditional auto loan to finance a new car purchase. These loans are often secured by your car. New car loans often come with lower rates than used car loans. Repayment terms differ by lender but can go up to 84 months. 

Used car

You can also use a traditional auto loan to finance a used car purchase. Similar to new car loans, most used car loans require your vehicle as collateral. These loans may come with higher rates than new car loans. 

Auto refinance

When you refinance, you replace your auto loan with a new one. Common reasons for an auto refinance include getting a lower rate and extending your loan term to reduce your monthly payment. 

Cash-out refinance

A cash-out refinance involves replacing your current car loan with a new, larger loan and using the difference for other purposes, such as paying off a higher-interest debt or paying for an unexpected expense.

Private party

Many people head to the dealership to buy a car, but some decide to purchase one from a private seller instead. In this case, a private-party auto loan may suffice. These are similar to traditional auto loans where you apply with a lender and await approval. 

Lease buyout

If you’re leasing a car but decide you want to keep it when your lease expires, a lease buyout auto loan may be what you need. This type of loan can help you buy your leased vehicle at the predetermined price in your lease agreement. 

Bad credit

Some lenders and dealers offer bad credit auto loans. These loans may have more flexible credit score requirements than traditional auto loans, but they generally come with higher rates. Most lenders consider borrowers with poor credit a higher risk, so they compensate for this risk by offering high interest rates. 

First-time car buyer

Dealerships and lenders may also have first-time car buyer programs for young drivers purchasing their first vehicle. These programs are designed to provide financing to borrowers with a thin—aka little to no—credit history. You may be able to find certain first-time car buyer programs offering competitive rates, but your interest rate through a program like this might be higher than a traditional auto loan. 

Title

Car title loans, or title loans, are high-cost, short-term loans. These loans use your car’s title as collateral, and you don’t get it back until you’ve repaid your loan and any lender fees in full. Fees on a title loan are often exorbitant—up to 25% of the total borrowed. Like payday loans, you should only consider car title loans as a last resort in a financial emergency. 

Military

Certain lenders—such as Navy Federal Credit Union—offer exclusive auto loans for military members. These loans tend to come with lower rates, longer-than-average repayment terms, and flexible qualification requirements. You’ll need to provide proof of military service when you apply for a military auto loan. 

Business fleet

If you need a vehicle for business purposes, you’ll likely need a commercial auto loan instead of a traditional consumer auto loan. Many lenders offer commercial auto loans you can qualify for by proving you’ve been in business for a certain time frame and providing copies of documentation such as your business tax returns.  

Classic car

Lenders often have age restrictions for financed vehicles. For instance, some may require that your car’s model year is fewer than 10 years ago. So you might need specialty financing to purchase a classic car. Classic car loans are less common than traditional auto loans. Some classic car loans come with longer-than-average repayment terms. For instance, Digital Federal Credit Union (DCU) offers an 84-month classic car loan. (You may need an appraisal to qualify.) 

If you have less-than-perfect credit, start with a private-party loan. If the private-party loan doesn’t work out, try a first-time car buyer loan (or a military loan if it’s applicable). If you can’t qualify for the previous two options, it might be time to consider a bad-credit auto loan.

Erin Kinkade, CFP®

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How to choose the best type of auto loan for you

To choose the best type of auto loan for you, consider your credit, financial circumstances, the car you plan to purchase, and your preferences. 

Here are hypothetical scenarios where one type of auto loan might make more sense than another: 

If…	Consider
You have good to excellent credit (FICO 670+)	A secured auto loan
Convenience is your highest priority	An indirect (dealership) loan
Getting the lowest possible rate is your top priority	A direct auto loan from a bank or credit union
You’re a new driver with thin (little to no) credit	A first-time car buyer loan
You want to finance a vehicle with high mileage	A used car loan with flexible mileage limits
You want to buy out your leased vehicle	A lease buyout loan
You need cash for other expenses along with the car purchase	A cash-out refinance auto loan
You’re buying from a private seller	A private party loan
You have fair or bad credit (FICO 669 or lower)	A bad credit auto loan
You’re purchasing a classic or collector car	A classic car loan specialized for vintage models
You’re a business owner looking to purchase multiple vehicles	A business fleet loan
You’re an active-duty service member or veteran	A military auto loan with possible rate discounts
You’re looking to pay off a your auto loan with better terms	An auto refinance loan
You have a car title with significant equity and need quick cash	A title loan

See our resource on using a personal loan versus an auto loan to buy a car.

If you’re a first-time car buyer, take the time to research the best loan for you, taking into account your credit history, report, and score. Shop at least three different lending options before deciding on which loan option fits in with your overall financial condition.

Most important: Do not purchase a vehicle that leaves your budget with little to no discretionary income, impedes your ability to establish and maintain an emergency savings account, or prevents you from saving for retirement.

Erin Kinkade, CFP®

How to apply for an auto loan

The process of applying for an auto loan can vary depending on your lender and loan type. Many lenders let you prequalify for a loan online, which can provide insight into the total loan and rate you might get. Prequalifying is an excellent first step in the process. 

After comparing potential options, move forward with a full application with your chosen lender. Many lenders let you apply for auto loans online, in addition to prequalifying. You’ll generally need to provide your personal information as part of the process, including:

• Name
• Birthdate
• Address
• Email
• Social Security number
• A copy of your driver’s license to verify your identity

Your lender will likely request financial information, such as recent pay stubs or W-2s, bank statements, and past tax returns. Most lenders also run a hard credit check and review your credit history as part of the loan decision process. 

To get started, check out our list of the best auto loans.

Should you get prequalified or preapproved? 

Prequalification and preapproval can help you estimate how much you can borrow for a car, but preapproval is more thorough.

• Prequalification involves a basic financial review, often including a soft credit check that doesn’t affect your score. It gives an estimate but isn’t a guarantee.
• Preapproval is more detailed and may require bank statements or tax returns. It often includes a hard credit check, which may lower your credit score by a few points. With a preapproval letter, you’ll know your likely loan amount and rate, giving you leverage when negotiating at the dealership.

What types of vehicles can I finance using an auto loan?

With most traditional auto loans, you can finance a new or used car, truck, or van for personal use. It’s possible to finance other types of vehicles, but you’ll likely need a specialty loan. 

Lenders offer different types of specialty loans, such as: 

• Motorcycle loan
• RV loan
• Snowmobile loan
• ATV loan
• RV loan
• Scooter/moped loan
• Jet ski loan
• Mobile home loan
• Boat loan

If you’d like to finance a nontraditional vehicle, such as a food truck, you may need an equipment loan, a business loan, or a commercial vehicle loan.