Insurance can be tricky, but insurance is one of the more important car purchases. So it’s only natural you would want to know the ins and outs. This article outlines the three main types of car finance and what they mean for you as a buyer. Whether you are looking for a new or used car, knowing about these types of financing will help make your decision so much easier!
Car Finance Types
1) Interest-Only Payments
Interest-only (IO) payments only cover the cost of interest, leaving the monthly payment almost as it was with a regular loan. For example, let’s say your monthly car payment is $300. Let’s further assume that your interest rate on a standard auto loan is 5%. If you make an IO payment of $300, that means you will pay $300 in interest each month (5% times $300). With that in mind, if you have an annual mileage of 10,000 miles per year and pay the same amount of money each month as you did before with a regular loan, it would take 4 years and 2 months before you even have paid off your initial car purchase.
2) Insured Credit Plans
Most car loans today have a down payment of at least 2% and require a security deposit of $500-1,000 (sometimes even more). Depending on the type of loan you choose, your monthly payments can be very different. For example, a standard auto loan with an interest rate of 0.7% usually has an average monthly payment of between $40-and $50 per month. If you apply for an insured credit card with Discover, the minimum amount required to open an account is 10% of the original purchase price; however, the average APR for this type of financing is 17%.
3) Uninsured Credit Plans
The most common type of loan is called an unsecured auto loan. With this type of loan, the percentage you are required to put down varies by lender and state. Some companies require you to put as little as 2% down with no money-back guarantee, while others require 10% or more. For example, if you choose to apply for a car with an interest rate of 12%, an average monthly payment will be $312 per month with no money-back guarantee. Most lenders offer a car loan that requires only a 3-month security deposit (which could be paid back in full at any time before the end of the loan term).