Fixed Rate Car Loans: Weighing the pros and cons

When searching for car loans, you may see “fixed rate car loans” pop up a few times. But what is it exactly? Having a fixed rate car loan means you’ll pay the same amount every month, fortnight, or week regardless of outside market factors like changing cash rates. It may not sound as economical as a variable rate loan where interest fees can decrease when rates fall but fixed rate loans have plenty of benefits. Read on to learn about the pros and cons of fixed rate car loans and see if it’s the right fit for you. 

Advantages of a fixed rate car loan 

A fixed rate car loan is great for those looking for more stability. Here’s a quick overview of the benefits fixed rate car loans offer: 

Consistency makes it easier to plan 

A fixed repayment amount allows for easier planning. You don’t have to keep up with changing repayment amounts and can plan your budget with more certainty. Easily create budget plans in advance as your fixed rate car loan repayments will be the same for the length of your loan term. 

Monitoring the repayment amount every month, fortnight, or week can make it harder to manage your finances. If you’re juggling multiple loans and bills, having a variable car loan with potentially changing repayments can be a hassle. 

You won’t be affected by rate increases 

The biggest downside of a variable rate car loan is that when interest rates rise, your car loan repayments will rise right along with them. If there’s a continuous increase in interest rates, it will reflect on your future repayment. This, in turn, will make your total repayment costs more expensive.  

With a fixed rate car loan, you don’t have to worry about fluctuating interest rates. Your repayments are set for the duration of your loan. You don’t have to worry about the total cost becoming more expensive as cash rates change. 

The best time to get a fixed rate car loan is when interest rates are at their lowest. While shopping around, compare the interest rates previously to what they are now and look at market projections to figure out if it’s an opportune time to get a car loan.  

Disadvantages of a fixed rate car loan 

Fixed rate car loans also have a few drawbacks which can outweigh the benefits. Here are the downsides to getting a fixed rate car loan: 

Inflexibility could cost you 

There is a lack of loan features and flexibility with fixed rate car loans. Usually, you’re not allowed to pay off your fixed rate car loan early without incurring a hefty fee. You also lose out on useful features that could lower the total interest cost of your loan like redraw facilities. Some lenders also won’t allow borrowers to change their repayment frequencies. 

Suppose you receive a windfall or a promotion and want to put that towards paying off your fixed rate car loan, for example. In some cases like these, you may be fined early payment penalties or won’t be allowed to make lump sum payments in addition to the established repayment amount. 

You can’t lower your interest rate 

The main disadvantage of fixed rate car loans is that you can’t lower your interest rate unless you refinance. Even if interest rates drop significantly, you’ll still be stuck paying the higher rate. This means you could end up paying more on a fixed rate loan compared to a variable one. 

Although it is possible to lower your interest rate through a car loan refinance, the process can be time-consuming and expensive. Refinancing involves leaving your current loan and applying for a new one which typically involves exit fees, break fees, application fees, and additional expenses. 

Factors to consider before applying for a car loan 

When choosing between a fixed rate car loan and variable rate car loan, here are a few things to keep in mind: 

• Your financial situation. The car loan you choose should match your needs. If you want to take advantage of early payments or redraw facilities, a variable loan may be right for you. Meanwhile, if you favour stable repayments more, a fixed rate car loan may be a better fit. 

• Loan terms and features. Understand what you’re allowed to do with a fixed rate car loan or variable car loan. Speak with a lending specialist and go through all your options carefully so you can find a car loan that works for you. 

• Cash rate and other market factors. Your loan’s interest rate will affect the overall cost of your loan. Before deciding on a variable or fixed rate loan, check out market forecasts to get a better idea of what interest rates could look like in the coming months. 

Looking for a low rate car loan? 

At loans.com.au, we have a range of fixed rate and variable rate car loans for you to choose from. Learn more about your finance options by speaking with our friendly lending specialists. Or if you’re ready to start your car loan journey, apply online today! 

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