Car Loans 101: Understanding the Basics


Loans of any kind are complicated and intricate financial agreements that command respect – auto loans are no different. There’s a stigma that car loans are cheap, simple, and easy-to-get – while that may be the case sometimes, it’s important that customers know and understand as much as possible about how loans work prior to signing on the dotted line (if not prior to applying for your car loan).

We hold our reputation as an honest and dedicated group of people near and dear to us at Eagle Ridge GM. We’re all about helping our valued customers understand the responsibilities they enter into when they sign for a car loan, so in this post, we’re putting our best foot forward to explain the basics of car loans.

car loan application

The Basics

Auto loans can come about in one of two forms:

  • Secured
  • Non-secured

The main difference between the two is the lender (the bank or dealership itself) will place a lien on an asset owned by the borrower under a secured loan. The securement being the asset itself. A secured loan allows the borrower to access a lower interest rate than they could typically obtain under an unsecured loan – and allows the lender to repossess the secured asset – sometimes another car, or a house – should the borrower not be able to make their agreed upon payments. In all, cheaper rate for the borrower, lower risk for the lender.

An unsecured loan does not give the lender any rights to repossess an asset should payments disappear – instead, the bank and/or dealer would pursue their money through legal means. Unsecured loans typically spell a higher interest rate, but give borrowers a sense of relief in that their homes or other vehicles cannot be repossessed.  


Simple Interest vs Precomputed Interest

Simple interest loans calculate interest based on a periodic basis. During each period of assessment, interest is calculated on the principal amount that’s outstanding on the original loan. Let’s imagine that a borrower pays off additional principal on their loan; then they’ll be exempt from paying interest on what’s already been paid off. This usually happens thanks to early, or inflated payments, and allow borrowers to pay off the loan with less interest in a shorter time frame.

deciding on simple loan

Precomputed loans on the other hand, require the loan borrower to stick to a predetermined interest and/or payment schedule where interest in pre calculated and added on the principal. Even if a borrower manages to pay off their loan more quickly with bigger or earlier payments, they can’t avoid the interest.


Specialty Loans

There’s more than one way to skin a cat, as they say – and car loans are available via a couple unique means that allow specialty loans to exist.

A title loan is a specialty auto loan where a borrower may hand over the title of their owned vehicle in exchange for a lump sum of money to put towards another vehicle – although this money does not legally have to be put towards another vehicle. The title allows the dealership to secure their loan by repossessing the owned vehicle should the borrower miss payments.

Lease buyout loans are specialty loans that allow lenders to make it simple for people to take advantage of the purchase option at the end of an auto lease, if they want to. The financial institution issuing the lease buyout loan essentially pays off the buyout fee to allow the borrower to make monthly payments directly to the institution or dealership. Once the remaining lease buyout loan is paid in full, the car is owned by the borrower.


Bad Credit?

Loans are generally based on the ability of a borrower to provide a satisfactory credit check. If they have a stable, good paying job history and income, bad credit usually derails people from obtaining an auto loan. Going bankrupt, missing payments, or having evidence of a repossession on your financial record will tip off a lender to your bad history of making payments, negatively impacting your credit. Having no credit (as a student, or a young person, for example) can also negatively impact for ability to get an auto loan, as there’s no information to reassure a lender that you can consistently make payments.

However, there are a number of steps you can take to rebuild your credit before borrowing money from a shady source to get a new vehicle.

  • Begin by cleaning up your credit history as best you can. Check your credit report as early on as possible by paying off past-due accounts, or disputing credit errors. This will add positive info to your account that may help in the long run.
  • Avoid adding to your debt! Don’t take on new credit cards, and pay everything on time. Avoid paying your rent late, declaring bankruptcy, tax liens, and negative ruling judgements against you in lawsuits.
  • Check current interest rates before you go car shopping. With bad credit, you’ll only (maybe) be approved for the highest interest rates, and this loan rate can affect your ability to pay back your loan every month. Checking interest rates will help you to prep for the financial impact of an already questionable credit rating and your ability to keep your head above water.
  • Make a big down deposit. Bad credit will negatively impact your maximum loan amount, and will fetch you a high interest rate. Paying a bigger down deposit on your new vehicle will help to reduce the overall loan amount, and will lower your interest rate as a result.
  • Seek pre-approval. Knowing ahead of time what you can confidently afford is often your best bet for vehicle shopping accurately. Check with your bank prior to car shopping to ask about the pre-approval process to see if it’s a possibility for you. Sometimes, car dealerships can put customers in touch with lenders who specialize in lending to those with bad credit.




There are many dealers that proudly advertise an ability to award people with bad credit, and even no credit with a loan that will secure their dream car, but it’s these types of situations that can make you squirm. Putting yourself ahead of the learning curve when it comes to a lengthy and complex financial agreement like a car loan is the best weapon to ensure you know what you’re getting into. Eagle Ridge GM is proud to help make that happen.