Fixed Rate Vs Variable Rate Car Loans: Which One Is Better?
So it’s time to buy a car! Unless you’re paying cash, you’re going to need a loan. You’re probably wondering whether you should go with a fixed rate of a variable rate, and we’re here to help you choose the right option. This guide will break down the difference and help you make the best decision for your needs and financial situation.
(Fun fact — did you know approximately 2.7 million Australians currently have a car loan?)
Car Loan Terminology You Need To Know
Before we cover the differences between these two car loan types, let’s address some key terms every borrower needs to know:
Interest rate: The interest rate is the amount you pay to the lender each year in exchange for borrowing money from their institution. It is expressed as a percentage (e.g. 3.25%).
Loan term: The loan term is the duration of your loan and the amount of time you have to pay back the money you borrowed. It is usually expressed in months (e.g. 36 months).
Down payment: The down payment is the amount of money that you agree to pay upfront at the time that you buy your vehicle. It goes toward the total cost and will lower your total loan amount. Think of this as your cash/savings.
Principal: The principal is the original amount of money that you borrow and agree to pay back (before interest and fees are added).
What Is a Variable Car Loan?
A variable-rate car loan comes with an interest rate that will go up or down over the course of the loan term. The rate varies depending on a lot of factors, including supply and demand, inflation, and government influences.
When you take out this type of car loan, there is no limit to the number of times an interest rate can change throughout a loan term. Because of this, there’s not a lot of certainty or predictability for borrowers who choose a variable loan.
Usually variable rates are more attractive, there’s just no certainty they will stay there.
What Is a Fixed-Rate Car Loan?
A fixed-rate car loan, on the other hand, comes with a set interest rate. It is determined at the time that you take out your loan, and it stays the same throughout the entire loan term, even if interest rates go up or down.
Fixed-rate car loans, naturally, provide a great deal of certainty, as the interest rate is locked in when you take out the loan. However, you may be able to refinance the loan and get a lower interest rate later if you choose (and your financial situation allows).
Did you know approximately 2.7 million Australians currently have a car loan?
Which One Is Right for Me?
Variable car loans and fixed-rate car loans both come with benefits and drawbacks. Below are the most important pros and cons to simplify the decision-making process and help you make the right choice;
Variable Rate Car Loan Pros:
You can save money on loan repayments when the market changes and interest rates go down.
Most variable loans have lower initial interest rates than fixed-rate loans.
Most lenders allow additional repayments, so you can pay off the loan faster.
Usually, there is no payout penalty if you pay the loan off before the term ends, which saves you money on interest.
Variable Rate Car Loan Cons:
You’ll have to pay more when the market changes and interest rates go up
There is less predictability and a risk of very high payments (which you may struggle to afford).
You may find monthly budgeting more difficult.
Fixed Rate Car Loan Pros:
You can enjoy a predictable car loan payment every month.
Household budgeting is easier and more consistent.
Your repayment rate stays the same, even when the market changes.
Most lenders still allow additional repayments, so you can pay off the loan faster and save on interest.
Fixed Rate Car Loan Cons:
You may face early payout penalties if you pay off the loan completely before the term ends (although most penalties are relatively small).
You may spend more in the long run since fixed-rate loans have higher interest rates compared to the initial rate for a variable loan.
At the end of the day, the type of car loan you choose will depend on your individual situation.
If you’re unsure of the best loan for your needs, talk to us today. We offer bad cred car finance in Brisbane and can help you narrow down your options in no time.
At the end of the day, the type of car loan you choose will depend on your individual situation.
Need Help Getting a Car Loan?
Now that you know more about the differences between fixed-rate and variable-rate car loans, do you have a better idea of which one is right for you? Do you need more help getting a loan or making a final decision?
No matter what you need, we’re here to help at Naked Loans. We are a car loan broker that specialises in bad credit car loans. We’re happy to work with all buyers and are confident we can find a loan that works for your needs.
Do you want to learn more about our bad credit car finance services? Click here to meet some of our lenders, or apply for a loan today in under 10 minutes!