What is a fixed rate car loan?
A fixed rate auto loan is a loan that locks in (or “fixes”) your interest rate for the life of the loan. One of the main advantages of this solution is the certainty of cash flows. By knowing exactly what your repayments will be, you’ll be able to plan ahead and budget for the future.
The fixed rate means you won’t be hit with an unexpected increase in repayments if the Reserve Bank raises the cash rate. This often helps with budgeting, as your repayments will stay the same.
Below are some of the most competitive fixed rate car loans available to help you get behind the wheel faster.
Advantages of a fixed rate car loan
The main advantage of a fixed rate car loan is security. By “fixing” your rate, you know what your repayments will be each week/fortnight/month.
For those on a strict budget, a fixed rate car loan allows you to have consistent repayments.
Another advantage of a fixed rate car loan is that you may be able to “lock” your interest rate at a low rate.
If market interest rates rise during the term of the loan, you will not be affected and you will continue to pay the same rate. Keep in mind, however, that banks and lenders are quite adept at predicting interest rate rises and falls, so your fixed rate will likely be set accordingly.
Disadvantages of a fixed rate car loan
The main disadvantage of a fixed rate car loan is the possibility of paying higher interest than a variable rate car loan. If market interest rates drop during the term of the loan, you will be obligated to pay the higher rate.
Additionally, many lenders are less flexible with fixed rate loans, making it harder for you to make additional repayments, adjust your repayment frequency (eg monthly to weekly), or refinance.
You’re also more likely to incur breakage fees on fixed-rate loans if you want to refinance or prepay the loan.
What are the types of fixed rate car loans?
There are two types of fixed rate auto loans, secured and unsecured.
A secured car loan is a loan where an asset (the car you buy) is used as collateral against the loan. This means that in the event that you fail to meet your repayments, the lender has the right to send the pension men to withdraw the asset from you in order to recover their funds.
Secured loans are the most common type of loan. A secured car loan is essentially the same as a home loan, with the car you buy being used as collateral. With a home loan, the purchased home is the collateral for the loan. If you don’t meet the repayments, the lender has the right to take the house from you and sell it.
As you might have picked up from the “no” in the name, unsecured car loans don’t require you to use your car as collateral. They don’t force you to use anything as a security, which naturally represents a much higher risk for them. If you were to have financial difficulties or go out of the network, the lender will have to sue you in order to recover their money. For this reason, they are essentially the same thing as a personal loan.
To compensate for this risk, lenders offering unsecured auto loans will generally charge a higher interest rate, more fees, and are unlikely to be as lenient with whom they lend. So, if you’ve fallen behind on the old credit score lately, you might have trouble getting an unsecured loan approved.
An unsecured car loan can be useful if you are buying a car as a gift for someone and you don’t want them to lose their car if you cannot deal with refunds.