Rateworks auto loan refinance
May 15, 2024

What are the Different Types of Auto Loans and Auto Loan Lenders?

How do I choose the best auto loan for my situation?
Written by

Jennifer Moore

Unless you live in an area where public transportation is abundant and easily accessible, you will likely need a car to get where you need to go. And when it comes to buying a vehicle, this is on the list of the five most expensive things you’ll ever have to buy. 

In fact, the average new car cost in 2024 is sitting around $47,000. That’s no small chunk of change. Most people don’t have this kind of cash sitting around. That’s why so many Americans turn to auto loan financing from auto loan lenders to help offset the car, breaking it down into bite-size payments made every month. 

This doesn’t mean, however, that you should apply for an auto loan with the first lender you encounter. Not all auto loans are the same. Not all auto lenders are the same, either. Doing your homework before signing a loan agreement is a non-negotiable.

Types of Auto Loans For Customers 

If you are thinking of purchasing a car or refinancing an existing loan, you need to understand your options and some key financial terms. Each loan type offers unique benefits and potential drawbacks, tailored to meet diverse financial situations and buying strategies. 

Here’s a closer look at the different types of auto loans available to consumers, and some of the terms you need in your vocabulary:

Secured vs. Unsecured Auto Loans

Secured auto loans are the most common type of auto financing. Here, the vehicle itself serves as collateral for the loan. If the borrower defaults, the lender can repossess the car to recoup losses. To avoid this situation, be sure to make your payments on time. Not only will this ensure your car stays in your possession, it will also help you to improve your credit score. Lenders love on-time payments.

Plus, this security typically leads to lower interest rates than unsecured loans. Unsecured auto loans, on the other hand, do not involve collateral. As a result, they carry higher interest rates and are generally harder to obtain, as they pose a greater risk to the lender.

Simple Interest vs. Precomputed Interest

Simple interest loans calculate interest based on the loan's outstanding balance, meaning that as you pay down the principal, the amount of interest you pay each month decreases. This type of loan benefits those who might have to pay off their loan early. 

Precomputed interest loans, however, calculate interest upfront based on the total amount of the loan over its entire term. This means even if you pay off the loan early, you may not save on interest payments, making it less flexible.

Let’s consider an example to illustrate the point. We’ll consider a $30,000 auto loan with a 5% interest rate and a 60-month loan term (five years).

  • Simple Interest: Interest is calculated on the remaining balance, which decreases as you pay off the principal. Monthly payments start higher but decrease over time, and paying off the loan early saves on interest costs.
  • Precomputed Interest: The loan term is calculated upfront and added to the principal. Monthly payments are fixed at $625. If you pay off early, you still owe the precomputed interest, so there are no savings from early repayment.

Direct vs. Indirect Auto Financing

Direct financing means a borrower obtains a loan directly from a bank, credit union, or online lender. This approach allows for pre-approval and potentially better rates since it involves shopping around directly. 

Indirect financing is facilitated through the dealership, where the dealer acts as an intermediary between the buyer and the lender. While convenient, it can often lead to higher rates due to the dealer’s markup.

Prequalification vs. Preapproval

Prequalification is an initial step in the borrowing process, where lenders give a ballpark figure of the loan amount and rates you might qualify for based on a soft credit check. This can be helpful for budgeting without affecting your credit score

Preapproval, however, involves a hard credit check and offers more concrete loan terms and amounts. It gives buyers a stronger bargaining chip when negotiating at the dealership.


Refinancing involves replacing your current auto loan with a new one, typically with a lower interest rate or different loan terms. This can reduce monthly payments, shorten the loan term, or help manage a change in financial circumstances. 

It's particularly beneficial when credit scores have improved since the original loan was secured, as this often leads to better rates. And, many car owners choose to refinance if they need to lower their monthly payment and spread payments out a bit further than what they have with their current loan.

RateWorks Makes it Easy to Refinance Your Auto Loan

For a lot of people, hearing the word financing can be enough to make you cringe. But with auto loans, especially those offered by RateWorks, it doesn’t have to be that way. Refinancing your auto loan is often easier than what you experienced when financing your loan in the first place.

We offer a variety of resources to make the process easier for you, too. From loan calculators to articles that tell you everything you need to know about refinancing your automobile, we try to lift that weight and give you the information you need to make an informed decision. And getting started is easy. All you need to do is complete the requested information to get a free quote.

Get started today and see how much you can be saving on your auto loan by refinancing with RateWorks.