Fixed Rate Car Loan vs Variable Rate Car Loan

When considering car loan options you have a choice between a fixed-rate loan and variable-rate loan, but which type of loan is best? Deciding on the best type of car loan for you will depend on a number of factors including your current financial situation, your comfort level with changing interest rates and your credit score. In this article we will compare and contrast fixed rate loans with Variable rate loans to help you assess which of these loan types best suits your requirements


Variable Rate Car Loan

A variable rate car loan has an interest rate which may fall or rise during the terms of the car loan, these rate fluctuations used to be primarily driven by changes in the official interest rate as set by the Reserve Bank of Australia, but in recent times the rate changes tend to be purely at the discretion of the lender. This means that lenders are not automatically passing on any rate decreases to you the borrower, when the reserve bank decreases the official interest rate.

Any change in the interest rate on your car loan will impact your repayments, which will rise or fall depending on the rate change applied by the lender, this means you have no certainty regarding the monthly payment you must make on your car loan, which can make budgeting tricky. The potential impact of a variable rate is further accentuated when you look at longer term loans, as the longer you have the loan the more time you are exposed to potential rate changes.

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Why should I choose a Variable Rate Car Loan?

Firstly for a variable rate car loan to be on your shortlist you must be comfortable with the fact that your interest rate and repayments over the term of the loan are likely to change, so if this uncertainty presents any concern to you, particularly in terms of meeting fluctuating repayment amounts, discount this loan type and move onto to consider the fixed rate alternative.

If you are ok with the uncertainty you’ll want to understand how and when Variable Rate Car loans can be a good option:

  • If you plan to take out a loan with a short term this will reduce your exposure to any interest rate
  • If you believe interest rates are destined to fall across the term of your loan a variable rate loan will enable you to reap the benefits of any rate reductions with lower repayments.
  • Variable Rate Loans often include arrange of features aimed at offering some flexibility, such as the ability to make extra repayments and then access these funds through a redraw facility should you wish to.


Fixed Rate Car Loan

A Fixed Rate Car Loan has an interest rate that doesn’t change during the term of the loan, so your repayments will remain the same for the full term of the loan. Fixed rate car loans are popular with car buyers who want to know exactly what they need to pay each month, whilst being protected from any impact of rate rises made by the lender. 

Lenders who believe interest rates are likely to rise over the term of their loan often select fixed rate car loans so they can fix their loan at a rate which they believe will save them money in interest charges should the rate increase in line with thier predictions.

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Why should I choose a Fixed Rate Car Loan?

The benefits of choosing a fixed rate loan are:

  • You will know exactly how much your repayments will be each and every month making it easier to manage your future finances.
  • If the lender increases their interest rates this will not affect you as your rate is fixed and so you are not exposed to these interest rate fluctuations. The potential downside of this is when your lender decreases interest rates, as you won’t derive any benefit from these.
  • You have the option to pay off your loan before the end of the term, this may attract a early repayment fee so it’s a good idea to include these fees in your assessment of the fixed rate car loans
  • Most fixed rate car loans include the option to make additional repayments that will result in you reducing the term of your loan and saving on interest charges.
  • When you are planning on repaying your loan over a longer term a fixed rate option will reduce your exposure to potential rate changes that are more likely when you select longer loan terms.
  • If you have saved a sizeable deposit this can often help you negotiate a lower fixed rate as the lenders risk is reduced relative to the deposit size. A deposit of 30% is good benchmark level at which lenders will consider offering rates below their minimum advertised rates.