Fixed vs. Variable Interest Rates: What You Need To Know

A fixed-interest rate car loan is where the interest rate remains the same throughout the term of the loan. This means that your monthly payments will be the same each month, making it easy to budget and plan your finances. With a fixed interest rate, you also know exactly how much interest you’ll pay over the life of the loan, making it easier to understand and compare loan options from different lenders. 

One of the biggest advantages of a fixed-interest rate car loan is that it offers stability and predictability. Additionally, fixed interest rates can offer peace of mind, since you don’t have to worry about fluctuations in the market or changes in interest rates affecting your monthly payments. 

However, one potential downfall of a fixed-interest rate car loan is that you may end up paying more in interest over the life of the loan if interest rates fall. This is because your interest rate will remain the same, even if interest rates in the market drop. If this happens, you may be able to refinance your loan at a lower interest rate, but this can come with its own costs and fees.

A variable interest rate car loan is where the interest rate can fluctuate based on market conditions over the term of the loan. This means that your monthly payments can also fluctuate, making it harder to budget and plan your finances. However, if interest rates drop, your monthly payments may decrease, which could save you money over the life of the loan.

Variable interest rate car loans are often cheaper than fixed interest rate loans and provide greater flexibility, making them an affordable and attractive option for new car owners. Additionally, some lenders may allow you to make additional payments or pay off the loan early without penalty, which can save you money in the long run. 

However, it’s important to keep in mind that a rise in interest rates could lead to unexpected changes to your monthly payments. This may result in higher payments that you may not be able to afford, making organising your finances month on month more difficult.

Ultimately, the decision of whether you choose a fixed or variable interest-rate car loan will depend on your individual circumstances and preferences. If you value stability and predictability, a fixed interest rate may be the safer choice for you. On the other hand, if you are willing to take on some financial risk in exchange for potential savings, a variable loan may be a better option.

You should also consider the current interest rate environment and market conditions. Additionally, your credit score and financial situation, including your income and expenses, will also play a big role in determining the interest rate you are eligible for. For this reason, it’s important to consult a trusted broker before signing on the dotted line.