Before purchasing a new set of wheels, it helps to explore your financing options and choose the right type of car loan to get the most out of the deal. Unfortunately, there is no formula for deciding which car loan is best for you, but knowing more about the options available can help you make an informed choice.
Fixed vs. variable rate auto loans
When applying for a loan to finance your car, one of the first decisions you need to make is whether to choose between a fixed and variable rate car loan. Both options have pros and cons and you should choose the one that matches your personal and financial needs.
Auto dealerships often offer fixed rate auto loans, where the interest rate remains fixed for the life of the loan or part of it. As a result, the repayment amount does not change during the fixed period, and you know exactly how much you have to pay the lender each month. Having certainty about your repayments can help you better manage your household budget. Another advantage of taking out a fixed rate auto loan is that even if the market rate increases sharply, your repayments will remain unchanged.
In contrast, a variable rate auto loan has an interest rate that follows the market. This means that your interest rate could go up or down over the life of the loan depending on the lender’s rate. So while you can start paying off your car loan at the lender’s advertised rate, you may find that your payments go down if the lender lowers their interest rate. On the other hand, you can end up making higher repayments if the rates go up.
Should I choose a fixed or variable auto loan?
Choosing between a fixed and variable rate car loan may depend on your preferences and your financial situation. Low-risk borrowers often tend to prefer the stability offered by a fixed rate auto loan. However, payment certainty comes at the cost of reduced flexibility, as most fixed rate auto loans charge prepayment and prepayment charges. If you expect your income to increase in the future and plan to pay off your loan sooner, an adjustable rate car loan may be a choice with more flexibility. It is also often easier to refinance a variable rate auto loan as there are no penalties or breakage fees applicable in most cases. On the other hand, you might be required to pay a fee for refinancing a fixed rate auto loan.
Whether you choose predictability over flexibility or vice versa, the decision ultimately rests on a careful assessment of your finances and your risk appetite. Overall, it is essential to consider the interest rate, fees, features, and benefits of auto loans from several lenders before choosing a product that is right for your current and future personal and financial needs.
Compare fixed and variable rate auto loans online to start your research.