Top 8 Car Loans

by Nancy

In most cases, when you walk into a financial institution to take out a loan, there are restrictions on its usage. Car loans work pretty much the same as traditional loans. You just need to specify you want to purchase a vehicle. Traditional financial institutions were full of red tape when it came to pre-approval of car loans. People preferred to take out personal loans which had no restrictions. Instead, they used the money to purchase cars. Today’s automotive market is full of flexible car financing options. Regardless of your budget, or financial status, there is a financing option available for you.

It is perfectly normal to secure a car loan before the actual shopping for a car. Customers with a good credit score will often have pre-approved loans. It is up to them to seek full approval for a car loan. Other customers will have to wait a little while for the lender to assess their eligibility. After approval, your lender will tell you the maximum amount you are eligible to borrow. You may either decide to borrow all of it or a percentage of the amount. With many institutions willing to help you buy a car, the question that remains is the type of loan you get. Different loans come with specific conditions such as down payment amount, interest rates, and payback period. We have compiled a detailed list of the top car loans that most lenders offer car buyers.

Refinance Car Loans

1. Simple Interest Loans

Simple interest loans are listed the top car loans amongst lenders. For this kind of credit, the periodic interest payable by a borrower is calculated using the outstanding balance of the principal. That means as you pay the regular payments, the initial borrowed amount reduces. However, the periodic fees remain the same, spread over the entire payback period. For most lenders, periodic payments are made monthly.

Simple interest loans are amortizing loans. That means, only a part of the monthly payment pays the borrowed amount. The remaining part is the loan’s interest. When all payments for the entire payback period are made, the loan is fully settled. For example, let’s say you borrow a $ 20,000 simple interest loan at 6 percent interest per annum. In the first month, you will pay $ 20,000 times 6 percent divided by 12 months or $ 100. If you pay $ 300 monthly, only $ 200 pays the initial amount. The following month, you pay interest on the outstanding balance of $ 19,800.

Another feature with simple interest loans is that compounding of interest is not allowed. That means, if you make your monthly payment late, you are charged a fee. The fee accrues over all the months you made your payment late. The total amount must be paid for the lender to release the car title to you.

2. Pre-Computed Loans

A pre-computed loan is also called the Rule of 78s. While a simple interest loan requires you to pay interest every month based on the outstanding balance, pre-computed loans are entirely different. You are required to pay back the principal and the total interest accrued over the entire payback period. In this arrangement, the lender requires you to pay a significant portion of the overall interest during the earlier months. Should you decide to pay back the loan early or refinance, you will still have an enormous amount to pay in interest. It is crucial that you ask your lender how he intends to calculate your interest, so you don’t fall into this trap.

3. Refinancing Loans

Refinancing loans are the best for current car loan holders. In this arrangement, your new lender gives you credit that pays off the first loan. People who refinance loans do it to save money. There two ways this can happen. The first one is a bid to reduce their monthly payments. The second is to seek a decrease the interest rate on the old loan. It’s not uncommon to see other people take out refinancing loans to eliminate particular co-signers in the previous loan. It is crucial that you understand the financial implications of the new loan before you take out a refinancing loan.

4. Secured Loans

Secured loans are also known as collateral loans. They are available for people with lower credit scores. The lender requires the borrower to pledge collateral to approve a car loan. Collateral is an asset or property that you own that can help you secure a loan. During the entire payback period, the asset will belong to the lender. Should you default monthly payments or fail to pay the loan, the lender sells your collateral to recover his money. Secured loans are also given to people who require a more substantial amount of money. Remember lenders cap the amount a borrower is eligible.

5. Personal Loans

Personal loans can either be secured or unsecured. Secured loans are borrowed against an asset or property as collateral. The lender partially owns the collateral during the loan period. Lenders can sell off the borrower’s collateral in the event the loan payment is defaulted, or the borrower fails to pay off the loan. Unsecured loans do not require any collateral, but the amount given is less than secured loans. Lenders provide the full amount of personal loans in a lump sum. Personal loans have no restrictions on usage. You may choose to use this money to purchase a car.

6. Conforming Loans

Most of you have heard of Fannie Mae and Freddie Mac. If you haven’t, these are government backed entities formed by Congress to maintain the stability of the credit market. A conforming loan is a loan that meets the minimum requirements set by these bodies. If your lender gives you a loan that meets the Freddie Mae and Freddie Mac requirements, they can sell it to them. In this arrangement, the lender removes the loan from his books and can give out new loans. If you qualify for conforming loans, take them out. The loans have lower interest rates translating to lower monthly payments.

7. Open Ended Loans

Open-ended loans also called a line of credit is a fixed loan amount agreed upon by a lender and a borrower. The loan is pre-approved and paid in portions until the agreed upon amount is reached. However, the borrower is allowed to pay back the money even before the lender gives the whole loan amount. Most people choose to use open-ended loans for small bills such as food, traveling, and gas. You may wish to borrow the entire amount and purchase a car. Some people specify to lenders that they require open-ended loans to buy a car. In that case, the entire amount may be provided early in the loan period.

8. Bank Loans

You may also choose to walk into an actual bank and borrow a loan to by a car. Most credit unions do not have strict restrictions on the use of funds. Bank loans are strictly used for the purpose they are borrowed. They perform a thorough credit of a borrower before approving a loan. Banks are known to ask for higher value collateral, and only approve a loan less than 50 percent of its value. Before you decide to walk this path, make sure you have your finances right. A bank loan is the best, it will ensure you use the money for its intended purpose.