Canadian car owners, buckle up. Used car prices are at an all-time high.
If you’re in the market for a vehicle, just one look at your dealership’s webpage can be disheartening. Checking out vehicles on Craigslist or Facebook Marketplace doesn’t feel that much better. Fortunately, there’s still a way to get the car you want: a car loan.
Of course, that’s easier said than done. The types of car loans you can choose from all have unique features ideal for specific cases. Choose the wrong one, and you could be locked into a bad loan for months or years.
Read on as we discuss everything you need to know about vehicle loans.
Terms for the Types of Car Loans
Before you get a car loan, understand that there are different categories of loans. Here are some of the broadest categories:
- Secured and unsecured loans
- Direct and indirect financing
- Preapproved and prequalified loans
Different Types of Car Loans
A secured loan uses what is called a lien. A lien, put simply, is when a lender has possession of an asset until you pay off the debt on it. In other words, the lender “owns” your car until you pay off the debt.
Secured loans are easier to obtain because the lender has this form of collateral. If you renege or default on your debts, they can claim the collateral for themselves.
That means you could possibly lose your vehicle if you don’t make your payments. Even if you paid a portion of the debt, you would lose that money and the car.
That means these loans tend to have lower interest rates, longer terms, and are easier to get. However, you risk a lot more than the lender if you fail to make payments.
Unsecured loans don’t require any lien. That means that the lender has no repossession rights concerning your property. You don’t need to provide any sort of collateral, and the lender cannot claim your assets via the law.
However, this means that the lender has to secure the loan by other means. This may include high-interest rates and shorter terms. If you have a cosigner, you may be able to get better rates.
That said, these vehicle loans are easy to get. If you’re searching for a bad credit car loan, these are probably the best option.
Keep in mind that since your auto loans are not on lien here, the lender has to turn to legal means. They may send debt collectors after you or file suit. Be careful to pay off your car loans whatever the case.
Direct and Indirect Financing
Two other terms to keep in mind are direct financing loans and indirect financing loans.
With direct financing, you go straight through a financial institution: banks and lenders. They will offer loans depending on how good your history and credit score is. You might not be able to get a bad credit auto loan this way, but it does offer the best rates.
Indirect financing is when your dealer shops out your loan to their own providers. You may have to turn to these options for a bad credit car loan. You will pay higher interest, and this may be a secured loan.
Preapproved Loans and Prequalified Loans
Prequalification involves the loan provider evaluating income, loan history, and credit score. They perform a soft pull to evaluate your credit, which doesn’t harm your score.
However, these loans are not always guaranteed. The interest rate will depend and may not be locked in. These do provide the fastest results compared to other loans.
Preapproved loans are much easier to obtain than the former. The lender puts in more commitment here and does a hard pull on your credit score. This can lower your credit score by a couple of points, even though it is temporary.
You shouldn’t worry about hard pulls too much unless you’re getting evaluations for multiple loans. Multiple hard pulls could damage your credit score in a way that won’t recover soon after.
Simple Interest Loans
With these loans, your monthly payment is different every month. This is based on the interest rate and the loan’s balance. These are the most common types of car loans on the market.
At the beginning of the loan, you pay more toward interest, with the remainder going toward the principal. As the loan ages, you spend more on principal with subsequent payments. This is the best loan type if you want to pay off your loan early.
Pre-Computed Interest Loans
If you’re looking for a set amount that never changes, you’ll want a pre-computed loan. This means that the loan provider computes the monthly payment from day one.
However, know that these loans can change over time. If you are late on payments, you may have to pay late fees rather than contribute to interest or principal. This is the best loan type if you don’t think you can pay off the loan before the final due date.
Special Loan Types
Last but not least, there are a few other loan options for edge cases:
- Military loans: loans with a significant discount for active duty service members
- Instant loans: high-interest loans that anyone can get, often at a dealership
- Title loans: high-interest loans based on your car’s title, which can lead to repossession if you don’t pay it off
- Balloon loans: a loan that starts with small payments and “balloons” into large payments at the very end
- Business loans: loans for fleets of cars that don’t qualify for the above traditional loans
Find Your Loans With Carsfast
There are many types of car loans for you to choose from, with options for a bad credit auto loan if you need it. In most cases, you want to opt for long-term, low-interest loans. However, you may have to resort to higher-interest loans if you have bad credit, and secure the loan with a lien.
CarsFast is the leader in vehicle loans for Canadians. Just fill out the questionnaire and get approved for a loan in minutes!