In most cases, a fixed-rate car loan is the best option. That’s because a variable-rate auto loan carries the risk of increased monthly payments. Variable-rate car loans may have an advantage if you don’t plan on holding the loan for a long period.
If youre thinking about financing a car, youll find loans that come with either fixed or variable interest rates. With fixed-rate auto loans, the interest rate remains the same for the entire loan term, while the interest rate on variable-rate car loans can change periodically.
Generally, a fixed-rate car loan is your best option. Thats because a variable rate auto loan carries the risk of increased monthly payments when interest rates rise. Longer-term variable-rate loans are especially risky because there is more time for the interest rate to rise.
When it comes time to finance a new or used car purchase, one of the biggest decisions you’ll make is whether to opt for a fixed or variable interest rate auto loan. Understanding the key differences between these two common auto financing options can help you make the right choice for your budget and financial situation.
What is a Fixed Interest Rate Auto Loan?
A fixed rate auto loan is a type of car loan that maintains the same interest rate throughout the full repayment term, This means your monthly principal and interest payments will remain the same from the first month of your loan until you pay it off completely,
The interest rate is set at the time you take out the loan based on current market rates and your creditworthiness. It doesn’t fluctuate over time as broader interest rates rise or fall.
Fixed rate car loans are offered for terms ranging from 12 months to 84 months. Longer terms tend to come with lower monthly payments but more interest paid over the life of the loan.
What is a Variable Interest Rate Auto Loan?
Variable rate auto loans have interest rates that can change periodically throughout the loan term. The interest rate fluctuations are tied to an underlying benchmark index like the prime rate.
As the prime rate goes up or down, the interest rate on your variable rate car loan also adjusts up or down accordingly. This means your monthly payments can fluctuate over the course of your loan.
Variable rate loans often start with low teaser rates to attract borrowers. But keep in mind the rates can rise significantly over time, leading to much higher monthly payments down the road.
Key Differences Between Fixed and Variable Auto Loans
There are some important distinctions between fixed and adjustable rate car loans:
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Interest rate behavior – Fixed rates remain static while variable rates can fluctuate often.
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Monthly payments – Fixed rate payments stay consistent. Variable rate payments can change regularly.
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Predictability – With a fixed rate, you know exactly what your monthly payments will be. Variable rates involve some uncertainty.
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Long-term costs – Over the life of the loan, fixed rates provide more predictable total costs. Total costs with variable rates are less certain.
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Market conditions – Fixed rates make sense when interest rates are low and expected to rise. Variable rates can offer lower initial payments when rates are high or falling.
Pros and Cons of Fixed Rate Auto Loans
Fixed interest rate car loans provide stability and predictability. But they also have some potential drawbacks to consider.
Pros:
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Payment amounts stay the same over the full loan repayment term.
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Interest expenses are predictable for budgeting purposes.
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You’re protected from interest rate hikes over time.
Cons:
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Rates are often higher than initial variable loan rates.
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You can’t take advantage if interest rates fall.
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Shorter terms come with higher payments.
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Refinancing can be expensive if you want to adjust your rate later.
Pros and Cons of Variable Rate Auto Loans
The adjustable nature of variable interest rate auto loans can provide flexibility. But there are also risks to weigh if rates increase.
Pros:
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Initial interest rates are often very low to attract borrowers.
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You can benefit later if the underlying index rate decreases.
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Usually easier to qualify for variable rate financing.
Cons:
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Monthly payments fluctuate and are unpredictable.
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Interest expenses can rise substantially over time.
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Short-term loans limit the risks of increasing rates.
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Caps on rate increases provide limited protection.
How to Choose Between Fixed or Variable Car Loan Rates
So how do you decide what type of auto loan interest rate makes sense for your situation? Here are some key factors to consider:
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Loan term – Fixed rates are better for longer loans where variable rate uncertainty increases. Shorter variable loan terms can limit risks.
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Time horizon – If you plan to own the car for many years, a fixed rate protects you from rising interest rates over time.
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Market forecast – When rates are low and expected to rise, fixed rates lock in lower costs. Falling rate environments favor variable loans.
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Budget – Fixed payments provide consistent budgeting. But variable rates offer lower initial payments.
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Early payoff – Variable rate loans can make sense if you plan to pay off the balance early.
Tips for Getting the Best Auto Loan Interest Rate
Whether you opt for a fixed or variable interest rate, here are some tips to score the lowest rate possible:
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Shop around with multiple lenders to compare options. Rates can vary significantly.
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Check your credit and improve your score if needed. Better scores mean lower rates.
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Put down a larger down payment if possible. You’ll borrow less and qualify for better rates.
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Opt for a shorter loan term to reduce interest expenses over time.
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Look for manufacturer financing deals offering discounted interest rates.
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Enroll in auto-pay to get interest rate discounts from some lenders.
The Bottom Line
When financing a car purchase, deciding between a fixed or variable interest rate loan involves weighing predictability against flexibility. Fixed auto loan rates offer stability while variable rates provide more initial savings but involve risks. Assess your budget, credit, loan term, and plans for the car to determine the best loan type for your needs. And shop around to get the most favorable interest rate possible.
Frequency of Entities:
- Fixed interest rate auto loan: 14
- Variable interest rate auto loan: 11
- Interest rate: 16
- Auto loan: 18
- Monthly payment: 5
- Loan term: 5
Pros of Fixed-Rate Auto Loans
- Predictability: A fixed-rate car loan is ideal for longer-term financing because the APR and payment never change over the duration of the loan, regardless of whats happening in the market.
- Long-term benefits: Generally, the longer the loan, the more risk the market interest rate will rise. With a fixed-rate loan, you have the peace of mind that your interest rate will never increase.
- Widely available: Most car loans have fixed interest rates, and you can apply for one through a dealership, bank, credit union or an online lender. Comparing multiple quotes is a wise strategy to find the lowest rates before making your decision.
How Do Fixed-Rate Car Loans Work?
A fixed-rate car loan has a set interest rate for the entire life of the loan, typically 36 to 84 months. Lenders calculate the interest rates they offer through risk-based pricing. In other words, a lender may charge you a higher interest rate if they believe youre more likely to default on your loan due to your credit score, income and debt levels, and other factors.
The interest rate you qualify for will be represented as an annual percentage rate (APR), which also includes the loans fees. A higher interest rate will result in higher monthly payments and will ultimately cost more over the life of the loan than a lower-rate loan. As with any financial product, its always wise to weigh the pros and cons before deciding between a variable or fixed auto loan.
Do auto loans have fixed or variable interest rates?
FAQ
Is car loan a fixed or variable cost?
How do I know if my loan is fixed or variable?
Is car loan fixed?
What are the variables for an auto loan?
Are car loans fixed or variable?
Now that you know the answer to the question, are car loans fixed or variable, it’s important to understand how each of these loans works. Fixed-rate auto loans typically have a loan term between 36 and 84 months. During that period, the interest rate on the loan remains the same. The average auto loan interest rate is about 6.07%.
Is a fixed rate car loan better than a variable rate?
With fixed-rate auto loans, the interest rate remains the same for the entire loan term, while the interest rate on variable-rate car loans can change periodically. Generally, a fixed-rate car loan is your best option. That’s because a variable rate auto loan carries the risk of increased monthly payments when interest rates rise.
Do auto loans have variable interest rates?
While they may exist, auto loans with variable interest rates are rare. Variable rates are usually only seen at specialized lenders and banks in other countries. Banks, credit unions, and other financial institutions offer both fixed rate and variable rate mortgages.
Do auto loans have fixed interest rates?
While some loans come with variable interest rates, others offer fixed interest rates. Here’s a look at the various types of loans you may consider and the types of interest rates you can expect. In most cases, auto loans have fixed interest rates so you can calculate exactly how much you’ll pay for your car.
Does a variable rate auto loan go up or down?
The prime rate can go up or down periodically. When the prime rate changes, the variable interest rate usually changes as well. That means with a variable-rate auto loan, your rate could go up if the prime rate goes up, which would make your monthly payments higher.
Should you choose a fixed rate or variable rate loan?
You might prefer fixed rates if you are looking for a loan payment that won’t change. With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because your interest rate can go up, your monthly payment can also go up.