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How to choose between fixed and variable rate car loans

How to choose between fixed and variable rate car loans

Before you buy a new set of wheels, it helps to explore your financing options and choose the right type of car loan to get the maximum value out of the deal. Unfortunately, there's no formula to decide which car loan is the best for you, but learning more about the available options can help you make an informed choice. 

Fixed vs variable interest rate car loans

When you're applying for a loan to finance your car, one of the first decisions you have to make is choosing between a fixed and variable interest rate car loan. Both the options have pros and cons and you have to pick the one that matches your personal and financial needs. 

Car dealerships often offer fixed-rate car loans, where the interest rate remains fixed for the entire duration of the loan or a part of it. As a result, the repayment amount doesn’t change during the fixed period, and you know exactly how much you need to pay to the lender each month. Having certainty about your repayments may help you manage your household budget better. Another advantage of taking out a fixed interest rate car loan is that even if the market rate suddenly goes up, your repayments will stay the same.

On the other hand, a variable-rate car loan has an interest rate that follows the market. It means your interest rate could go up or down throughout the loan term according to the lender’s rate. So, while you may start paying down your car loan at the lender's advertised rate, you might find your repayments drop if the lender cuts its interest rate. On the flip side, you may end up making higher repayments if the rates rise.

Should I pick a fixed or a variable car loan?

Deciding between a fixed and variable rate car loan may depend on your preference and financial situation. Risk-averse borrowers often tend to prefer the stability offered by a fixed-rate car loan. However, the certainty in payments comes at the cost of reduced flexibility, as most fixed-rate car loans levy early repayment and prepayment charges. If you're expecting your income to increase in the future and plan to pay down your loan early, a variable rate car loan might prove to be a choice with more flexibility on offer. It's also often easier to refinance a variable rate car loan as there are no penalties or break fees applicable in most cases. On the other hand, you might be required to pay a fee for refinancing a fixed-rate car loan. 

Whether you choose predictability over flexibility or vice-versa, the decision eventually rests on a thorough evaluation of your finances and appetite for risk. Overall, it's essential to consider the interest rate, fees, features and benefits of car loans from multiple lenders before picking a product that suits your present and future personal and financial needs. 

Compare fixed and variable rate car loans online to kickstart your search.

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This article was reviewed by Personal Finance Editor Mark Bristow before it was published as part of RateCity's Fact Check process.



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