Fixed vs Variable Car Loans
If you’re in the market for car finance, here’s a helpful guide on the key differences between fixed and variable rate car finance.
What is a fixed-rate car loan?
A fixed interest rate car loan is a loan with the option to lock in (or ‘fix’) your interest rate for a set period of time (usually between one and five years). Most borrowers will choose this type of loan if they want to have cash flow certainty. By knowing exactly what your car repayments will be, you’ll have the same repayments for the whole fixed period.
Fixed car loans can be secured or unsecured, which will also influence the interest you pay back over the life of the loan.
Essentially a secured loan gives the lender the right to take back the asset (the car) if repayments can’t be made, and as this poses less risk to the lender the interest rate on a secured loan is likely to be much less than an unsecured loan.
Pros and cons of a fixed loan
The main advantage of a fixed-rate car loan is the certainty of knowing your repayments. By “fixing” your loan for a period of time, you know what your repayments will be every week/fortnight/monthly payment.
This consistency is great for those on a tight budget or who just love to budget their ongoing expenses. Another advantage of a fixed-rate car loan is you may be able to “fix” your interest rate in at a rate that stays lower than the variable rate throughout the ‘fixed’ term. If interest rates rise, you will be happily paying under that rate at your fixed rate.
On the flip side, the main con of a fixed loan is if interest rates drop, you could be stuck paying more interest on your loan than those with a variable rate.
Another disadvantage of fixed rate car loans is less flexibility. Fixed loans don’t allow for redraw facilities and also may come with high fees to pay out the loan early or make lump sum repayments.
That means if your situation changes, you can’t knock off a large chunk of your loan in one go.
What is a variable loan?
A variable rate loan is a loan where your interest rate will move (or ‘vary’) with changes to the market. This means you need to be able to adjust to possible rises and falls in your repayments.
Variable car loans often have appealing features like the ability to make extra repayments with a redraw facility (often at no extra cost) to help you pay off your loan sooner and save you interest.
Variable rate loans are more uncertain than fixed interest rate loans. This can make budgeting for your interest payments more difficult because you have to take into account potential rate rises. If you aren’t prepared, you could have trouble keeping up with repayments.
Pros and cons of a variable loan
One big advantage of a variable rate loan is the option for a redraw facility. This means you can make additional repayments and withdraw them if needed.
This allows you to change your repayments as your situation changes. For example if you change jobs, or begin earning a higher income, you can knock off some of that loan in one chunk!
Of course the main drawback of a variable rate loan is the possibility for the market to move, causing interest rates to rise and subsequently your repayments rising with them.
Another disadvantage is variable rate loans do not allow for balloon payments.
A balloon payment is a one-off lump sum that you agree to pay your lender at the end of your car loan’s term.
How to choose the right car loan rate type for you
Every person has a different situation and different needs for their car loan. At loans.com.au, we offer a variety of options. Whether it is variable, fixed, secured, we have a loan to suit you and your needs.
Ultimately, when considering fixed or variable, you need to look at your budget and your repayments. Many customers choose to fix their loan in order to lock in regular repayments that won’t change, to help them budget.
If you are happy to ride the changes in interest rates, with the opportunity to spend less, then a variable loan might be better for you.
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About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
