Should I Get A Fixed Or Variable Rate Car Loan?

Should I Get A Fixed Or Variable Rate Car Loan?

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Most secured car loans will be a fixed rate loan, but you might choose to take out a variable rate personal loan to purchase a car.

Here's how the different options compare to give you an idea of the features and benefits of each:

Compare Fixed & Variable Interest:

Advantages Disadvantages
Fixed Rate Loan
Repayment amounts determined in advance.
Protection from interest rate increases for the loan term.
When secured by an asset, interest rates may be lower.
No ability to benefit from interest rate drops.
Additional loan payments may attract a fee.
Variable Rate Loan Make additional repayments at any time.
You may benefit from a redraw facility.
Loan Term is 1-7 years.

Exposure to interest rate increases.
Repayment amount may change from month to month.
An unsecured loan might attract a higher interest rate.

Use a variable rate personal loan to buy a car when:

  • You are buying an older used car
  • You need flexibility to use part of the funds for other reasons
  • You plan to pay back the loan ahead of schedule to save on interest
  • You intend to use the loan as a cash flow tool

Use a fixed rate car loan when:

  • Buying a new car
  • You intended to keep the car for the whole loan term
  • Preparing a definite budget
  • Securing a fixed rate loan will give you a lower interest rate

How are car loan interest rates determined?

Car loan interest rates are set by the lender, based on the current financial climate and the risk that your loan represents.

1. RBA rates and bank competition

When there's more competition between banks and lenders, they will reduce rates to secure your business.

Traditional banking has changed a lot in the last five years, with emerging online & peer-to-peer lenders putting pressure on traditional banks to improve their products and service. This is why it pays to check with a car loan broker to see what your loan options are.

RBA rates and car loans

RBA rates have not changed in Australia since October 2016, but when they do increase, this will immediately impact you if you have a variable rate loan. If you have a fixed rate loan, you will not be affected, but any new fixed-rate loans taken out at this time will attract higher interest rates.

Find out more here about how RBA rates affect car loans and what we predict will happen this year.

2. Your car and credit profile

The risk to the lender that you won't repay the loan amount also affects your interest rate. The lender assesses your financial profile, including your current income, surplus income that's available to make loan repayments, and your past credit conduct.

Australia implements mandatory positive credit reporting in 2018, so your good conduct on loans is considered as well as negative events.

Find out how positive credit reporting will affect your next car loan application.

How your car affects your interest rate

When you take out a secured car loan, the value of the asset used to secure the loan affects the interest rate. Buying a new car that's easily valued, and providing a car loan deposit, will mean that you'll be offered a lower rate.

This is because the lender registers an interest on the vehicle on the PPSR for the duration of the loan, giving them the legal ability to repossess and sell the car if you can't repay the loan balance.

With a variable rate loan, there's no security provided, so the type and age of the car won't affect the interest rate. The lender has no way to recover the sum borrowed, so they charge a slightly higher rate.

Your ideal car loan will depend on your specific circumstances, and this article provides general advice for you to consider. If you are seeking personalised advice and a complimentary financial assessment, contact our friendly customer service team.

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