Types of Car Loans: Everything You Need to Know

Buying a new or used car usually requires financial assistance, and loans are the most common way to do this. As you do your research, you might come across the different types of car loans, and there are several to consider.

Types of Car Loans

Your credit score,  payment history, and loan terms will impact auto loans.  The average auto loan term is 72 months, regardless of type. The average APR for new auto loans is estimated to be 7% in 2025.

Secured car loans are those that are backed by an asset, which is usually the car itself. The main advantages of a secured car loan include an easy approval rate since your car is the collateral, but there is a risk of repossession in case of default.

Additionally, secured loans guarantee lower interest rates for larger loan amounts.

Unsecured Auto Loans

When you use a personal loan to buy a new or used car, you are using an unsecured car loan. This is a more flexible and simpler way to secure financing before you even finalize your car purchase.

There are, however, chances for high interest rates , and you definitely need a good credit score to apply for unsecured car loans.

Loans for buying a car

As the name suggests, car purchase loans are loans for the purchase of a car, available from banks, credit unions, or online lenders. This method requires you to put down a certain amount as a down payment, but offers some room to negotiate on your loan needs.

Therefore, if you explore this, you will come across dealer financing, private car loans and lease buyout loans .

In other words, car purchase loans can be either direct or indirect financing. For example, loans you get from the dealership are indirect financing, while direct financing includes loans obtained from banks or credit unions other than the dealership.

Financing the concession

This may sound convenient, but with dealer financing, the dealer acts as a middleman, connecting you with a lender and, therefore, limiting your control over choosing a specific lender.

Lease buyout loans

A lease buyout loan allows you to purchase your leased car at the end of the lease term. It is a loan specifically designed to purchase the car at the price agreed upon in your lease agreement. In other words, the lease payments cover the depreciation of the car over the term of the lease. Once you have made all the buyout loan payments, you own the car.

Simple Interest Loans

Simple interest loans are based on interest rates and the amount you owe. In other words, your monthly payment amount stays the same; at first it goes toward interest, and then as more payments are made, it goes toward paying down the principal.

Types of Car Loans

With a pre-calculated interest loan, the total interest and any fees are calculated in advance and spread evenly over the term of the loan.

Therefore, there will be no difference even if you make additional payments, because the interest is already added to each payment.

Special Auto Loans

These loans are specifically for active and retired military personnel. They are offered by direct and indirect lenders. Similarly, there are credit unions that offer loans exclusively to active and retired military personnel.

Car Title Loans

Car Title Loans Car loans are a risky business because they come with exorbitant interest rates and are obtained through the title of a paid-off car loan. The amount you get can be used for other purposes, but if you fail to repay the loan, it can lead to the vehicle being repossessed.

Final thoughts

While it is always better to have a high and solid credit score to get affordable interest rates when applying for car loans, make sure to also get pre-approved for the car loan. Pre-qualification , you can get an estimate of your loan, which will help you choose the loan and lender. Similarly, researching and comparing loans before buying will ensure you a better negotiation and better rates.