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What To Choose Between Fixed & Variable Rate Car Loans

Apr 5, 2022 | Insights

Deciding on which car to buy can be a tough choice, but trying to choose between a fixed or variable interest rate car loan can be even trickier. There’s a lot to consider and a lot of financial jargon that can drive you to confusion, particularly if you’re going for your first car loan.

Let us help guide you down your car loan path by explaining the difference between fixed and variable rate car loans, and what each may mean for you.


The difference between a fixed interest rate loan and variable rate car loan

As the name suggests, a fixed rate loan is where the interest rate is fixed at the rate determined at the time of your application, whereas a variable car loan has an interest rate that will vary over the course of the loan, depending on changes to the interest rates set by the Reserve Bank of Australia (RBA).

Variable Interest Rate Car Loan



  • More likely to be able to make additional repayments, or apply to refinance the loan without penalty
  • Your interest rate will likely go down over time, depending on interest rate movements
  • Generally more flexibility than fixed interest rate loans



  • Your interest rate is open to increase when RBA increases interest rates
  • Variable interest rates are often applied at the discretion of the lender, meaning that even if rates go down, they may not pass the rate cut.

Fixed Interest Rate Car Loan


  • 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 interest rates up


  • 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
  • Any reduction to interest rates won’t be passed on, as your rate is fixed at the time of your loan commencement.

Let’s make it happen!

How do I choose between a fixed vs variable interest rate car loan?

There is no one size fits all approach when it comes to choosing between your car loan options. This is because your financial situation, both now and in the future, is going to be different to most other people. Knowing how a variable interest rate or a fixed interest rate might affect you is the first step in deciding on which interest rate option you’re going to select for your next car loan.


Is your income likely to increase over the loan term?

A car loan is a commitment, and one that can be with you for an extended period of time; anywhere up to 7 years, in fact! If your income is likely to increase over that time, then consider whether you may want to make some extra repayments towards the loan and get it paid off quicker.

Most fixed interest rate loans don’t allow you to repay the loan early, or will charge you an early repayment fee to do so. Variable rate car loans on the other hand, often will 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. Finance One customers with Consumer Loans can pay their loan out at any time without an early payout fee.

Do you prefer predictability?

Setting a budget and sticking to it can be made easier when you know for certain what your expenses are going to be. Having a fixed rate car loan can provide certainty over your loan repayments as they will remain constant, over the full duration of your loan. Even if the RBA changes the cash rate (which influences interest rates), you will continue to pay the interest rate agreed at the time of your loan commencement.


What are the other fees involved?

The interest rate type shouldn’t be the sole determining factor when you choose the right car loan for you. A vehicle purchase comes with many costs, including ongoing fees that will be applicable to your loan. These could include annual fees, repayment frequency change fees, or loan maintenance fees, depending on the credit provider or lender.


Comparing car loans

Most car loans offered by car dealerships are fixed rate car loans, which isn’t going to be the best car loan option for everyone. Even if you’re going for a new car loan, it pays to look at more car loan options before signing on the dotted line.

Many people compare loans through comparison websites which are helpful, because they use comparison rates that help show the true cost of a particular product, depending on the loan amount.

What the comparison rate fails to show is:


      • The lending criteria
        If you’ve never had a personal loan or a credit card before, then car loan offers can 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 at the end of your loan term which helps reduce the interest you’re charged and can lower your car loan repayments.
      • Are early repayments available?
        Even if you’re not planning on paying out the loan before its due to be repaid, refinancing your car loan is technically paying it out, which means you may be stuck, unable to refinance, or being heavily penalised 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.

Top Tip

You can often access lower interest rates by opting for a secured loan over an unsecured 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.

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.

The second step is to understand your affordability and which car you’d like to aim for. You may even like to use our car loan calculator or check out the 10 upcoming cars to keep your eye on in 2022.

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.

All loan applications subject to normal lending criteria. Fees and charges are payable. Terms and conditions apply.

Finance One means:

Fin One Pty Ltd
ABN: 80 139 719 903  |  ACL: 387528

Finance One Commercial Pty Ltd
ABN: 18 634 900 548

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Makala Elliott

Makala is the Marketing Manager at Finance One. She has worked in the Finance and Lending industry for over 10 years, gathering a wealth of experience. She is passionate about helping Australians get back on track with their finances by passing on her knowledge.

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