Many or all companies we feature compensate us. Compensation and editorial research influence how products appear on a page. Auto Loans Types of Auto Loans Updated Dec 08, 2023   |   12-min read   |   This article has been reviewed by a Certified Financial Planner™ for accuracy. Written by Jess Ullrich Written by Jess Ullrich Expertise: Banking, insurance, investing, loans Jess is a personal finance writer who's been creating online content since 2009. She specializes in banking, insurance, investing, and loans, and is a former financial editor at two popular online publications. Learn more about Jess Ullrich Reviewed by Erin Kinkade, CFP® Reviewed by Erin Kinkade, CFP® Expertise: Insurance planning, education planning, retirement planning, investment planning, military benefits, behavioral finance Erin Kinkade, CFP®, ChFC®, works as a financial planner at AAFMAA Wealth Management & Trust. Erin prepares comprehensive financial plans for military veterans and their families. Learn more about Erin Kinkade, CFP® According to AAA’s Your Driving Costs study, the average purchase price of a vehicle in the U.S. is $34,876 in 2023—an increase of over $1,500 from 2022. Given the high and rising cost of buying a car, taking out an auto loan to cover the cost is common. Many online lenders, banks, and credit unions offer car loans, and loan types and borrower requirements differ by lender. If you’re shopping for an auto loan, it’s important to understand the options so you find a loan that meets your needs. Here’s what to know about auto loan types and variations, as well as how to choose the best loan. In this guide: 3 variations of auto loansThe different types of auto loansHow to choose the best type of auto loan for youHow to apply for an auto loanWhat types of vehicles can I finance using an auto loan? 3 variations of auto loans The three common variations of most auto loan offerings are: Secured vs. unsecuredDirect vs. indirectSimple vs. computed interest Knowing how they work can help you compare loan options. Secure vs. unsecured Secured and unsecured loans are the first variation. With a secured loan, your lender requires collateral—or an asset that secures the loan in case you default. In the case of secured auto loans, your vehicle is that asset. Secured loans often come with lower interest rates because the collateral lowers the lender’s risk. To protect their collateral, your lender may require you to get comprehensive and collision insurance on your car with a secured loan. Most traditional auto loans are secured, but you could also use an unsecured personal loan to buy a car. Lenders don’t require collateral for unsecured loans, but the lack of collateral means you’ll likely get a higher interest rate. Secured and unsecured loans offer benefits and drawbacks, and as with any loan, paying late or missing payments could harm your credit. ProsConsBest for🔐 Secured (traditional auto loan)Lower ratesWidely availableRange of repayment termsLender can seize your car if you miss paymentsBorrowers seeking a straightforward auto loan at a lower rate🔓 Unsecured (personal loan)Widely availableRange of repayment termsCould help you avoid repossession if you miss paymentsHigher ratesMight require good or excellent creditBorrowers with strong credit seeking more flexibility Direct vs. indirect financing Direct and indirect financing are also options when applying for an auto loan. With direct financing, you apply for a loan with a bank, credit union, or online lender. Indirect financing works differently: Instead of applying with a lender, you apply at the dealership when you find the car you want. With direct financing, you have more control over which lenders you choose to work with than with indirect financing. Most dealerships offer loans from a smaller selection of lenders. ProsConsBest for🏦 Direct (via bank, credit union, or online lender)May have lower rates than indirect financingFreedom to compare loans from whichever lenders you chooseCan use loans for private purchasesComparing options can be time-consumingMay require good or excellent credit Borrowers interested in flexibility and control over their financing options🚘 Indirect (via car dealership)Convenient to apply at the time of vehicle purchaseRequires less research Lower credit scores may be acceptedMay have higher rates than direct financingMore limited loan selectionCan’t use for private purchasesBorrowers seeking convenient, time-saving financing What our expert recommends Erin Kinkade CFP® If the borrower has the time to do their research and has good to excellent credit, I strongly suggest going with a direct loan. However, if it is an emergency and the borrower does not have time or the credit required for a direct loan, the indirect loan may be their best option. Ultimately, it depends on the borrower’s circumstances. Simple vs. computed interest The third auto loan variation is simple vs. computed interest. With a simple-interest loan, the total interest you pay each month is based on your outstanding loan balance. If you make payments early or put more toward the principal each month, you’ll pay less in interest over time. With a computed-interest loan, the lender calculates the total interest you’ll pay over your loan term and divides it by the number of months in your term. You’ll pay the same amount of interest each month, regardless of your loan balance. Simple-interest loans are more common than computed-interest loans. Many lenders offer simple interest loans, but you’re more likely to find a computed-interest loan at a “buy here, pay here” lot specializing in car loans for bad credit. ProsConsBest for➕ Simple interest (most common)Interest costs tend to be lowerLower rates (in most cases)Many lenders offer simple-interest loansMay required good or excellent creditBorrowers who want to pay less interest⌨️ Computed interest (often at buy here, pay here dealers)May accept lower credit scoresRates and interest costs may be higherBorrowers with poor credit and few options The different types of auto loans In addition to car loan structures, the types of auto loans differ. Here’s a look at auto loan categories and how each loan type is structured. Auto loans, no matter the type, almost always require monthly payments to your lender. Click the loan type in the table below to read more about it. Tip Loan structures differ by lender, so it’s essential to understand how a lender structures its loans before you apply. Secured or unsecured?Direct or indirect?Simple or computed interest?NewGenerally secured 🔐 Both 🏦🚘Generally simple ➕UsedGenerally secured 🔐 Both 🏦🚘Generally simple ➕Auto refinanceGenerally secured 🔐 Direct 🏦Generally simple ➕Cash-out refinanceGenerally secured 🔐 Direct 🏦Generally simple ➕Private partyGenerally secured 🔐 Direct 🏦Generally simple ➕Lease buyoutSecured 🔐 Both 🏦🚘Generally simple ➕Bad creditSecured 🔐 Generally indirect 🚘Generally computed ⌨️ First-time car buyerGenerally secured 🔐 Both 🏦🚘Generally simple ➕TitleSecured 🔐 Direct 🏦Generally simple ➕MilitaryGenerally secured 🔐 Both 🏦🚘Generally simple ➕Business fleetGenerally secured 🔐 Both 🏦🚘Generally simple ➕Classic carGenerally secured 🔐 Direct 🏦Generally simple ➕ 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 exist, but they’re harder to come by 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.) Have less-than-perfect credit? Here’s our expert’s advice Erin Kinkade CFP® First, 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. 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: BorrowerAliceBrianCarlosCredit profileGood (700 FICO score)Excellent (810 FICO score)Thin (new driver working to build credit)PriorityConvenience Lowest possible rateQualifying for a traditional auto loanBest optionSecured, indirect auto loan from the dealershipSecured, direct auto loan from a bank or credit unionFirst-time car buyer loan See our resource on using a personal loan versus an auto loan to buy a car. Expert advice for first-time car buyers Erin Kinkade CFP® I suggest first-time car buyers take their time to research the best loan for them, taking into account their credit history, report, and score, and to shop at least three different lending options before deciding on which loan option fits in with their overall financial condition. Most important: Do not purchase a vehicle that leaves your budget with little to no discretionary income or impedes your ability to establish and maintain an emergency savings account or prevents you from saving for retirement 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: NameBirthdateAddressEmailSocial Security numberA 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. Should you get prequalified or preapproved? Prequalifying and getting preapproved for an auto loan offer insight into how much you could borrow for a new or used car. But one is typically more involved than the other. When you prequalify for an auto loan, your lender will do a basic assessment of your finances to estimate how much you can afford to borrow. The amount you prequalify for isn’t necessarily the amount you can qualify for. Your lender will likely do a soft credit check—which has no impact on your credit score—as part of the prequalification process. The preapproval process for auto loans often involves a deeper look at your finances. You may need to verify your assets and income with bank statements, tax returns, and more, and your lender may do a hard credit check, which can cause your credit score to drop by a few points. Once you’re preapproved, you’ll generally get a letter indicating how much you might qualify for and a potential rate. Having a preapproval letter in hand when you head to the dealership to buy a car could help you negotiate on financing. What documentation is needed to apply for an auto loan? Your lender will request your personal information when you apply for an auto loan, including your name, address, phone number, email, and Social Security number. You might also need the following documentation, but requirements differ by lender and type of sale. W-2sBank statementsPast tax returnsDriver’s licenseProof of insuranceUtility bill or other statement as proof of residenceBill of sale or purchase agreement Current vehicle registration 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 loanRV loanSnowmobile loanATV loanRV loanScooter/moped loanJet ski loanMobile home loanBoat 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.