Let’s face it — buying a car is exciting, but navigating the world of auto loans can feel like entering a maze with no map. Whether you’re eyeing your first ride or upgrading to something sleeker, understanding what is the best type of loan for a car can save you serious money (and a lot of stress).
If you’ve been Googling terms like secured vs. unsecured auto loans or wondering if you should get prequalified or preapproved, you’re in the right place. This guide breaks it all down — in plain English — so you can make smart, future-proof choices for your wallet and wheels.
Secured Auto Loans vs. Unsecured Auto Loans
Secured auto loans are the most common type. Here, the car itself is used as collateral. If you default on payments, the lender can repossess your vehicle.
Pros:
- Lower interest rates
- Easier to qualify for (especially with average credit)
Cons:
- Risk of losing your car if you don’t keep up with payments
Unsecured auto loans, on the other hand, don’t require collateral. These are more common with personal loans used to buy a car.
Pros:
- No risk of repossession
- More flexibility in how funds are used
Cons:
- Higher interest rates
- You’ll need a strong credit score to qualify
Verdict: If you’re building credit or want lower monthly payments, secured loans are generally the better option for car purchases.
Simple Interest Loans vs. Precomputed Interest Auto Loans
Simple interest auto loans charge interest daily based on your loan balance. That means the faster you pay off your loan, the less interest you’ll pay overall.
Precomputed interest loans calculate the total interest upfront and add it to your loan. Paying it off early doesn’t save you much (if anything).
Today’s Tip: Look for simple interest loans — especially if you plan to pay more than the minimum each month.
Direct Auto Financing vs. Indirect Auto Financing
Direct auto financing means you borrow straight from a bank, credit union, or online lender. You do your own shopping for rates and terms.
Indirect auto financing is when the car dealership acts as the middleman, connecting you with lenders (and sometimes marking up the rate for their cut).
Why Gen Z prefers direct financing:
- Transparent rates and terms
- Ability to compare lenders online
- No surprise fees
Pro tip: Use platforms like Credit Karma, NerdWallet, or your bank’s prequalification tool to compare direct financing offers.
Prequalification vs. Preapproval — Know the Difference
These two sound the same but aren’t:
- Prequalification: A soft pull on your credit. It gives you a general idea of what you might get approved for.
- Preapproval: A more serious offer, often involving a hard credit check. Shows sellers you mean business.
Gen Z hack: Use prequalification tools first to explore without impacting your credit. Then get preapproved when you’re ready to buy.
Special Types of Auto Loans
Not all car loans are one-size-fits-all. Here are a few tailored options:
- Lease Buyout Loans: Want to keep your leased car? This loan helps you buy it.
- Bad Credit Auto Loans: Designed for those with credit scores under 600. Rates will be higher, but approval is possible.
- Military Auto Loans: Exclusive low-rate loans for service members and veterans.
- First-Time Buyer Programs: Some lenders offer perks for new drivers without much credit history.
Auto Loan Refinancing: Should You Do It?
Refinancing = replacing your current loan with a new one (hopefully with a better rate or term).
You might refinance to:
- Lower your interest rate (especially if your credit has improved)
- Reduce your monthly payment
- Pay off your loan faster
Watch out for: Prepayment penalties or extending your term too long (you might end up paying more in interest over time).
How to Choose the Right Type of Car Loan for YOU
Here’s how to figure it out:
- Know your credit score: The better your score, the better your rate.
- Set a monthly budget: Be real — what can you actually afford?
- Compare interest rates: Look at the APR, not just the monthly payment.
- Look beyond the dealership: Direct financing can save you big bucks.
- Consider total loan cost: Multiply your monthly payment by the loan term to see what you’re really paying.
Bonus Tip: Use online loan calculators to play with numbers before committing.
What Is the Average Length of a Car Loan?
Right now, the average car loan term is around 72 months (6 years). Some stretch to 84 months (7 years), but longer terms mean more interest paid over time.
Our advice? Stick with 60 months or less if you can swing it. Your future self will thank you.
What Credit Score Do I Need to Get an Auto Loan?
Here’s a rough breakdown:
- 750+ (Excellent): 0–5% APR
- 700–749 (Good): 4–6% APR
- 650–699 (Fair): 6–9% APR
- 600–649 (Poor): 9–14% APR
- Below 600: Likely subprime rates, but not impossible
Heads-up: Many lenders have minimum requirements, so check before applying.
What’s the Average Interest Rate on an Auto Loan?
As of early 2025, here’s what rates generally look like:
- New cars: ~6.5% APR
- Used cars: ~8.5% APR
- Refinancing: ~5–6% APR if your credit has improved
Rates vary depending on your state, lender, and credit score. Always shop around!
Final Thoughts: So, What’s the Best Type of Loan for a Car?
There’s no one-size-fits-all answer, but here’s a cheat sheet:
