Choosing the right car is one thing, but choosing between a fixed or variable interest rate for your car loan can be even more challenging. With so many factors to consider and financial jargon to navigate, it is easy to feel overwhelmed – especially if this is your first car loan.
Let us help guide you down your car loan path by explaining the difference between a fixed rate loan and variable rate car loans, as well as what each may mean for you.
Variable vs Fixed Car Loan: Understanding Your Options
As the name suggests, fixed rate car loans have an interest rate that is locked in at the time of your application and remains constant throughout the loan term. On the other hand, variable rate car loans have an interest rate that varies, based on changes to the target cash rate set by the Reserve Bank of Australia (RBA).
Variable Interest Rate Car Loan
Pros:
- More likely to be able to make additional repayments or refinance the loan without penalty.
- Your interest rate (and regular repayments) may decrease depending on interest rate movements.
- Generally more flexibility than fixed interest rate loans.
Cons:
- If the RBA raises the target cash rate and interest rates rise, your interest rate, as well as your regular loan repayments, may increase.
- Variable interest rates are often applied at the lender’s discretion, which means that even if the target cash rate falls, the lender may not pass the rate reduction onto you.
Fixed Interest Rate Car Loan
Pros:
- More certainty over what your repayments are going to be every month.
- Your interest rate won’t increase over the life of the loan, even if the RBA puts the cash rate up.
Cons:
- Fixed interest rate loans are often inflexible, meaning you may not be able to change your repayment amount, pay the loan out before it’s due, or refinance the loan without incurring penalty fees.
- If interest rates fall, the reduction won’t be passed on, as your rate is fixed for the life of the loan.
How to Choose Between a Fixed vs Variable Interest Rate Car Loan
When it comes to choosing between fixed and variable interest rates, there is no one-size-fits-all solution. Your financial situation, both now and in the future, will differ from that of the majority of people. Knowing how a variable or fixed interest rate may affect you is the first step in deciding which interest rate option to choose for your next car loan.
Is Your Income Likely to Increase Over the Loan Term?
When you take out a car loan, you are making a commitment that could last up to seven years! Consider whether you might want to pay off the loan faster if your income is expected to increase. The majority of fixed loans either prohibit early repayment or impose early repayment fees. Variable rate car loans, on the other hand, often allow you to increase your car loan repayments or make additional repayments without penalty. All Finance One customers can make extra repayments or increase their repayment amount at any time, without penalty.^
Do You Prefer Predictability?
If sticking to a budget is important to you, a fixed-rate car loan offers the advantage of consistent, predictable repayments. With a fixed rate car loan, your interest rate remains unchanged for the entire term of your loan, providing peace of mind. Even if the RBA adjusts the cash rate (which influences interest rates), you will continue to pay the rate you agreed-upon at the time of your loan commencement.
What Are the Other Fees Involved?
When choosing the best car loan, the interest rate is just one factor to consider. A vehicle purchase involves numerous expenses, including ongoing fees that may apply to your loan. Depending on the credit provider or lender, these could include annual fees, repayment frequency change fees, or loan maintenance fees. Be sure to factor these into your decision.
Comparing Car Loans
The majority of car loans offered by car dealerships are fixed rate loans, which may not be the best car loan option for everyone. Even if you’re getting a new car loan, it’s a good idea to shop around before signing on the dotted line. Many people compare loans using comparison websites, which are beneficial because they show the true cost of a particular product based on the loan amount. However, the comparison rate fails to show:
- The lending criteria.
- If you’ve never had a personal loan or a credit card before, then car loan offers might be misleading, as you won’t have a credit history, and therefore may be declined by certain lenders.
- Does the lender offer balloon payments? A balloon payment is a lump sum payment due at the end of your loan term that can reduce the interest you’re charged and lower your car loan repayments.
- Are early repayments available? Even if you don’t plan on paying out your loan early, refinancing your car loan is considered paying it out, which means you may be stuck, unable to refinance, or being heavily penalized if you do.
- Lower interest rates don’t always apply. Advertising interest rates can be troublesome in that the interest rate you pay can vary greatly depending on the strength of your loan application, including your creditworthiness, income, loan amount, loan term, and personal situation.
How to Know What the Best Loan Option Is
Looking at all of your loan options, knowing what’s important to you, and speaking with a lender that will take your full situation into account is the most sensible way to find out the most appropriate loan option for you. Let’s make it happen!
Apply For a Car Loan At Finance One, we take a personal approach when it comes to assessing your application. We look at your full situation and may be able to help out even if you have a low credit score, bad credit history, or if you don’t quite fit the mold for the traditional lending criteria.
At Finance One, we take a personal approach when it comes to assessing your application
^ Some of our loans do have an early payout fee. We recommend you review your loan terms or contact us to confirm if an early payout fee applies to your loan.
Normal lending criteria apply. Fees and charges are payable. Terms and conditions apply.
Disclaimer: The information above is of a general nature only and does not consider your personal objectives, financial situation or particular needs. You should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your particular circumstances. We do not accept responsibility for any loss arising from the use of, or reliance on, the information.
Finance One means:
Fin One Pty Ltd ABN: 80 139 719 903 | ACL: 387528
Finance One Commercial Pty Ltd ABN: 18 634 900 548
Top Tip
You can often access lower interest rates by opting for a secured loan over an unsecured Car Loan. Unsecured loans bring with them more risk to the lender, so if you’re taking out a personal loan for a new or used car, consider using your car as security.
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