A big part of buying a car is figuring out how to pay for it. For most people, a car loan is necessary. But it turns out there are several types of car loans. What makes each one different from the other, and which one is the best option? Take a look at what each type of car loan can offer before deciding on the right one.

Secured Car Loan

Most car loans are secured loans, which just means the lender has the power to repossess the car and then resell it to someone else if the borrower does not make payments. Basically, the car is the collateral for the loan, ensuring the lender gets its money even if the borrower can no longer pay.

Unsecured Car Loan

With an unsecured car loan, the lender doesn’t require collateral. However, to make up for the risk to the lender, this loan does have high interest rates. This type of loan is hard to get, as it requires excellent credit, so it’s not very common.

Simple Interest Loan

With this type of car loan, the interest is based on the amount of principal on the loan at the time the borrower makes the payment. So if the total loan is $10,000 and the remaining principal is $5,000, the interest will be based on the $5,000 rather than the original total. This type of car loan is good for borrowers who want to pay off their car loan early without any penalties.

Precomputed Interest Loan

The opposite of a simple interest loan is a precomputed loan, in which the lender calculates the interest on the original amount and then spreads it over the number of months in the loan. This means that even as the borrower pays down the loan, he or she pays the same amount of interest every month, so paying it off early doesn’t make sense.

In-House Financing

It’s possible to get a car loan from a dealership, thanks to in-house financing. This provides a one-stop shop for buying a car and is especially helpful for people with bad credit. But the downside is that the interest rate is often high, so it may not be best for people with good credit who have a shot at lower interest rates.

Direct Financing

Banks and credit unions both offer direct financing, which means borrowers can get a loan from a financial institution that they already have a relationship with. This route usually offers the best interest rate and allows people to shop for a car from either a private seller or a dealership, since they’re pre-approved and can spend the money on a car from anywhere.

In general, people who have good credit and want the lowest interest rate possible often find the most success with a secured, direct loan from their own credit union or bank. But people who have bad credit or just want a simpler car buying process might prefer other options, so it’s important for borrowers to consider their own unique circumstances when choosing the best type of car loan.

Sources: Debt.org , Consumer Reports