Money Tree: How To Grow Your Own Financial Success

2 Common Types of Car Loans You Can Get

21 August 2015 by Dora Carr

If you are thinking about buying a new or used car for the first time, and you are going to finance it, you need to be aware of the types of loans on the market so you can select the best one for your financial situation. Car loans differ in interest rate, length of loan and amount of monthly payment, so to help you out, here are the two most common types of loans.

Standard -- A standard loan, also known as a direct bank loan, is the most popular type of car loan on the market. You can either go to your bank and ask a loan representative to qualify you for a loan, or you can visit another bank or credit union to see if you meet their criteria for a car loan. Your credit rating and current income are two of the biggest factors that determine whether you qualify for this type of loan and the amount of interest you will pay on the loan. If your income is at a higher level and your credit rating is strong, you may be able to put down a higher amount of money as a down payment, which will reduce your principal balance and earn you a favourable interest rate. Standard loans on new vehicles are more difficult to obtain because the bank is assuming a bigger risk, but whether you are buying or new or used vehicle, you will need to have a down payment.

Lease --  A lease is a type of car loan in which you never own the vehicle you drive. Unlike a standard loan, in which your name is on the title to the car, a lease is more like a rental agreement over a fixed period of time in which you make monthly payments and retain all privileges related to the vehicle, but at the end of the lease period you must return the car. Lease vehicles are owned in full by a bank, credit union or car lot, and unlike a standard car loan, you are often able to get a lease with a very small down payment or no down payment at all. Leases are advantageous if you know you won't need the vehicle for more than a few years or if you can't afford to pay for a car for more than a couple of years. Leases are often used by people who use their car for business purposes, because the payments and maintenance of the vehicle are eligible for tax deductions. One thing to remember about a lease is that it has a gas mileage allowance. If you exceed that allowance, you will pay for each kilometre you drove over the allowance. In addition, while general wear and tear is permitted, any physical damage to the leased vehicle is your financial responsibility.

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