If you’re planning to buy a car, understanding the different types of car loans can save you a lot of confusion and money. Many people jump into the first loan they come across, only to realise later that there were better options available. In this guide, we will walk you through the most common types of car loans so you know exactly what you’re signing up for. By the end, you’ll feel more confident about choosing a loan that actually fits your budget and your needs. Let's get started.

What are the Different Types of Car Loans Available in India?

1. New Car Loan

   A new car loan is the most common option for anyone planning to buy a brand-new vehicle. When you apply for this loan, most banks and lenders are ready to cover up to 90 percent of the car’s on-road price. You only need to pay the remaining amount as your down payment. The on-road cost includes the showroom price along with compulsory charges like insurance, RTO registration fees, and road taxes. If you have your eye on a new model, this loan makes it easier to bring it home without paying the full amount upfront.

2. Used or Pre-Owned Car Loan

   If you want a car without stretching your budget too much, a pre-owned car loan is a good choice. This loan is designed for buyers who prefer a second-hand or used car. Lenders generally finance up to 75 percent of the car’s value, and the vehicle acts as security until you finish paying all your EMIs. The loan period is usually shorter than a new car loan because the value of a used car keeps decreasing with time. This option works well if you want an affordable vehicle with manageable monthly payments.

   Looking for a smart way to finance your next used car? Apply for a Freo Used Car Loan today and enjoy flexible EMIs, quick approval, and competitive interest rates, all from the comfort of your phone.

   New Car Loan vs Used Car Loan

   Feature / Aspect	New Car Loan	Used Car Loan
   Purpose of the Loan	Offered to buy a brand-new car directly from a dealer or showroom.	Designed to help you purchase a pre-owned or second-hand car.
   Loan Amount	Usually covers up to 90 percent of the car’s on-road price.	The loan amount depends on the car’s current market value and age, generally around 70 to 80 percent of the value.
   Interest Rate	Lower interest rates since the car is new and has higher resale value.	Slightly higher interest rates because of the risk of depreciation and uncertainty in the car’s condition.
   Loan Tenure	Longer repayment period, usually between 5 to 7 years, depending on the lender.	Shorter repayment period, usually around 3 to 5 years, since older cars have a shorter usable life.
   Processing Time	Quick and straightforward since all documents are new and verified easily.	May take more time because the lender verifies the car’s age, condition, and ownership history.
   Insurance Requirement	Comprehensive insurance is mandatory for new cars, often bundled with the loan.	Insurance is still required, but lenders may ask for a valid existing policy before approving the loan.
   Documentation	Simple documentation process since the car is being purchased from an authorised dealer.	Involves more checks, including car registration papers, ownership transfer documents, and inspection reports.
   Eligibility Criteria	Easier to qualify since the car acts as strong collateral.	Slightly stricter, as lenders consider both the borrower’s credit score and the car’s condition before approval.
   Down Payment	Usually lower because the loan amount covers a larger portion of the car’s price.	May require a higher down payment since the lender covers a smaller percentage of the car’s value.

3. Auto Refinance

   Auto refinance lets you replace your current car loan with a new one that offers better terms. Maybe your interest rate feels too high or your monthly EMIs are putting pressure on your budget. By refinancing, you can lower your EMI, get a better rate, or extend your loan tenure. This option is mainly for people who already have a car loan and want a more comfortable repayment plan. It gives you a chance to reduce financial stress while keeping your car.

4. Balloon Loans

   A balloon loan is structured in a way that your EMIs stay lower throughout the loan period. However, at the end of the tenure, you pay a large final amount called the balloon payment. This type of loan works for people who want smaller monthly instalments and expect to have a larger sum available later. It is useful if you have predictable income coming in the future. Just remember that the final payment will be significantly higher than the regular EMIs.

5. Loan Against Car

   A loan against car helps you raise extra money by using your existing vehicle as collateral. If you need funds for personal or financial reasons, and you already own a car, this option can be very helpful. Banks usually offer a wide range of loan amounts, sometimes going up to 10 lakh or even the full valuation of your car. Since the loan is secured against your vehicle, the approval process is usually quick. The interest rates are higher compared to regular car loans, so it is important to plan your repayment well.

By Loan Collateral

6. Secured Auto Loan

   A secured auto loan is backed by collateral, which is usually the car you are buying. Since the lender has your vehicle as security, the interest rate is generally lower and the approval process is smoother. If you miss payments, the lender has the right to take back the car. This type of loan works well for anyone who wants better rates and does not mind using the vehicle as a guarantee.

7. Unsecured Auto Loan

   An unsecured auto loan does not require any collateral. The lender gives you the loan based on your credit score, income, and overall financial profile. Since there is no security involved, the interest rates are higher and the eligibility requirements are stricter. This option suits people who want a car loan without putting their vehicle at risk, as long as they have a strong credit history.

   Secure vs Unsecured Car Loan

   Feature / Aspect	Secured Car Loans	Unsecured Car Loans
   What Backs the Loan	The car you are buying is used as collateral. The lender can take back the vehicle if you do not repay.	No collateral is required. The loan is given based on your financial reliability.
   Interest Rates	Usually lower since the lender has security.	Often higher because the lender takes more risk.
   Approval Process	Approval is generally smoother if you meet basic requirements because the car secures the loan.	Approval depends more on your credit score and income stability. It may be harder to qualify.
   Loan Amount	You can usually borrow a higher amount because the car’s value supports the loan.	The loan amount may be smaller since there is no asset backing it.
   Repayment Tenure	Longer repayment periods are often available.	Repayment periods may be shorter to reduce lender risk.
   Risk for the Borrower	If you default, the car can be taken by the lender.	If you default, the lender cannot take the car but may take legal action and affect your credit score.
   Who This Suits	Works well for buyers looking for lower rates and comfortable repayment plans.	Suitable for people who do not want to pledge the car or who need quick funds without paperwork related to collateral.
   Documentation	Includes extra paperwork related to pledging the car.	Usually involves less documentation because no collateral is attached.
   Overall Cost of the Loan	Tends to be more affordable over time due to lower interest payments.	Can be more expensive because of higher interest charges.

By Lender

8. Direct Financing

   Direct financing happens when you take a loan straight from a bank, NBFC, or credit union. You apply directly, compare offers, and choose the one that suits your budget. This approach gives you more control because you can check interest rates, loan terms, and processing charges across different lenders. It is a good option if you want transparency and prefer choosing your loan before you start the car buying process.

9. Indirect Financing (Dealer Financing)

   Indirect financing is when you get the loan through the car dealer instead of going to a bank yourself. The dealer works with multiple lenders and brings you offers on the spot. It is convenient because the entire process happens at the showroom while you select your car. However, the interest rates may be slightly higher because the dealer often adds a commission. This option works well if you want a quick and hassle-free loan without visiting different banks.

   Direct vs Indirect Financing

   Feature / Aspect	Direct Financing	Indirect Financing (Dealer Financing)
   How the Loan Is Arranged	You contact the bank or lender yourself and apply for the loan directly.	The car dealer arranges the loan on your behalf through their tie-up lenders.
   Control Over Loan Process	You have full control over comparing lenders, interest rates, and loan terms.	The dealer handles the process for you, so you have less control over comparing all available options.
   Interest Rates	Rates are often more transparent and may be lower because there is no middle party.	Rates can be slightly higher since dealers may add a small margin before offering the loan.
   Convenience	Takes more time since you need to research lenders, submit applications, and wait for approval.	Very convenient since you can complete the loan process at the dealership while buying the car.
   Approval Speed	May take longer depending on the lender and documentation.	Usually faster because dealers work with multiple lenders who process applications quickly.
   Negotiation	You can negotiate directly with the lender for better terms.	Limited negotiation since the dealer presents final terms from partner lenders.
   Paperwork	You handle most of the paperwork yourself.	Dealer manages all the paperwork, which reduces your effort.
   When It Works Best	Good for buyers who want to compare rates and save money on long-term interest.	Helpful for buyers who want a quick and simple process without visiting banks.

By Interest Rate

10. Fixed-Rate Loan

    A fixed-rate loan keeps the interest rate the same throughout the loan period. Your EMI stays constant from the first month to the last, which makes planning your budget easier. This type of loan is helpful for people who prefer stability and do not want their monthly payments to change over time.

11. Floating-Rate or Variable-Rate Loan

    A floating-rate loan has an interest rate that changes based on the market. Your EMI may go up or down depending on how the market rates move. This option works for people who are comfortable with some fluctuation in their payments. You may end up paying less if rates drop, but you should also be prepared for higher EMIs if rates rise.

    Fixed vs Floating Rate Loan

    Feature / Aspect	Fixed-rate Loan	Floating-rate Loan
    Interest Rate Behaviour	The rate stays the same throughout the loan period. Monthly payments remain stable and predictable.	The rate can change based on market trends. Monthly payments may increase or decrease.
    Monthly Instalments	EMI stays constant. It becomes easier to plan your budget.	EMI may vary. Payments can rise during market hikes or drop if rates fall.
    Risk Level	Lower risk because the borrower knows exactly how much they will pay every month.	Higher risk since the EMI depends on market fluctuations.
    Total Cost Over Time	Usually higher than floating loans if market rates drop, but stable and free from surprises.	Can be cheaper if interest rates go down. More expensive if rates continue to rise.
    Best For	People who prefer stability and do not want changes in monthly expenses.	People who are comfortable with market changes and want the chance to save if rates fall.
    Common Use Case	Ideal for long-term planners or those with a fixed monthly budget.	Suitable for borrowers who expect interest rates to drop or who want to take advantage of market dips.

How to Apply for a Freo Vehicle Loan

If you are planning to buy a vehicle or a used car Freo makes the whole process simple, quick, and fully digital. You can start and finish everything on your phone without running around or dealing with long paperwork. Here is how you can apply.

1. Visit the Freo Website or App

   Start by opening the Freo website or downloading the Freo app. This is where your application begins.

2. Choose Your Loan Type

   Freo gives you a flexible credit line that you can use as a used car loan or even as a personal loan. You can withdraw the amount you need for your car, as long as it is within your approved limit.

3. Check Your Eligibility

   To apply, you must be a salaried or self-employed professional with a minimum take home income of ₹30,000 per month. Your age should be between 23 and 55. You also need to be living in one of the cities where Freo is available.

4. Submit Your Basic Details and Documents

   Next, fill in your personal and income details. The app will guide you through the document upload section. You will need:

   • PAN card number
   • A professional selfie through the app
   • Address proof like Driving License, Passport, or Aadhar
   • ID proof like Driving License, Passport, Voter ID, Aadhar, or PAN

   These documents help Freo verify your identity and process your approval faster.

5. Get Instant Approval

   Once your details are verified, Freo gives you real-time approval for a credit line of up to ₹5 lakh. You can withdraw any amount you need for your car, starting from ₹3,000 up to the limit you qualify for.

6. Flexible Disbursal and Repayment

   The approved amount gets disbursed quickly into your account. Repayment is also simple. You can choose EMIs from 2 to 36 months, and you will only pay interest on the amount you actually use.

7. Complete Your Purchase

   Use the disbursed funds to pay directly for your preferred used vehicle. After payment, ensure the vehicle’s Registration Certificate (RC) is transferred to your name and all documents are in order.

Closing Thoughts

Choosing the right car loan becomes much easier when you understand what each option offers. Take a little time to compare the loan types, think about your budget, and see what feels comfortable for you. Whether you want a brand new car or a used one, there is always a loan that can match your needs. Once you know your choices well, you can move ahead with confidence and bring home the car you have in mind.

Frequently Asked Questions (FAQs)

1. How much CIBIL score is required for a car loan?

   Most lenders prefer a CIBIL score of around 750 or higher for a smooth approval process. A higher score gives you a better chance of getting a lower interest rate. If your score is below this range, you might still get a loan, but the terms may not be as favourable.

2. Is a car loan secured or unsecured?

   A car loan is usually a secured loan. This means the car you buy acts as the security for the loan. If you fail to repay it, the lender has the right to take back the vehicle.

3. What are the factors that affect the interest rate on a car loan?

   Your credit score, income, type of car, loan amount, loan tenure, and your relationship with the bank all play a part in deciding your interest rate. New cars usually get lower rates compared to used ones.

4. When should I apply for a loan against my car?

   You can apply for a loan against your car when you need quick funds and already own a vehicle that is fully paid off. It is useful when you want money without selling your car and prefer lower interest rates than unsecured loans.

5. What are the documents required to apply for a car loan?

   You will usually need identity proof, address proof, income proof, bank statements, photographs, and documents related to the car you plan to buy. Some lenders may ask for extra documents based on your profile.

6. What is the average length of a car loan?

   Most car loans last between three to seven years. Shorter tenures come with higher monthly payments but lower interest costs. Longer tenures reduce your monthly burden but increase the total interest paid.

7. What are the benefits of getting a car loan?

   A car loan helps you buy a vehicle without paying the full amount upfront. It lets you spread the cost over time, build your credit history, and choose a repayment plan that fits your budget. Some lenders also offer special schemes and flexible options.