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Different Types Of Car Loans

A car loan is, in essence, a financing product which allows individuals to borrow money in order to purchase a car. The lender approves the borrower for a set amount and charges a percentage of interest on the principal throughout the term of the loan. The borrower is obligated to pay back both the principal loan amount as well as all interest charges in monthly installments over the course of the loan term. The lender technically retains possession of the vehicle purchased by the borrower until the loan has been paid back in full. There are a number of different types of car loans available to borrowers, tailored to meet the different purchasing and budgetary requirements of borrowers. 1. Pre-Computed Car Loans: In a pre-computed car loan, the principal and interest payments are calculated and fixed prior to the signing of the contract. The borrower cannot change the payment amounts once the loan goes into effect, even if they would like to make higher payments. While this form of car loan was once very popular, it is not as widely used anymore as the contract terms of pre-computed car loans do not allow for early repayment of the loan. Even if the borrower were to pay the principal loan amount off early, they would still be obligated to pay the lender the pre-agreed amount of interest. 2. Simple Interest Car Loans: Most people who apply for a car loan will end up with a simple interest car loan. A simple interest car loan differs from a pre-computed car loan in terms of the way in which interest is calculated. In a simple interest car loan, the interest rate is set prior to signing the contract and that rate is applied to the balance on a daily basis, with interest charges accruing each day. The advantage of a simple interest car loan is that it allows borrowers to make larger payments on their monthly installments, giving them the freedom to pay down their balance more rapidly and lower their interest payments without being penalized for it. Simple interest car loans also give borrowers the ability to pay off their loan early, although some lenders will charge borrowers a pre- payment fee. 3. Auto Equity Loans: An auto equity loan is a good option for someone who wants to buy a cheap car, costing no more than a few thousand dollars, but needs a loan in order to raise the funds. Acquiring a regular car loan for a relatively small sum of money is not really cost-effective, as lenders typically set minimum loan amounts and charge higher interest rates for smaller loans in order to generate a reasonable profit. However, an auto equity loan works by using the equity in a vehicle already owned by the borrower as collateral for a short term loan. As with any type of car loan, the borrower will lose possession of the vehicle they used as collateral if they default on their loan payments.  Choosing the right type of car loan for you depends on a number of factors including your credit history, the amount of money you need to borrow, and your financial status. An experienced loan agent or financial advisor can help you decide on the best course of action for you.
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