When it comes to a fixed or variable rate car loan, unfortunately there’s no exact formula where you can punch in all your details and magically come up with the right choice for you. It ultimately all comes down to your personal financial situation and the features you’re after.
With interest rates in constant flux, understanding the differences between the two car loan options can help you make the right financial choice.
What is a Fixed-Rate Car Loan?
A fixed rate car loan is a loan with the option to lock in (or ‘fix’) your interest rate for the entirety of the loan term (usually between one and five years). In other words, your repayments will stay the same from start to finish, regardless of whether the Reserve Bank (RBA) increases the cash rate or your lender hikes variable rates or rates on new fixed loans.
They tend to be the most common type of interest rate for car loans.
A fixed rate can be the right option for those who want cash-flow certainty. By knowing exactly what your repayments will be, you’ll be able to plan ahead and budget for the future.
There are also two types of car loans, secured and unsecured.
A secured car loan is one where an asset (most likely the car you’re buying) is used as collateral against the loan in the event you fail to meet your repayments. In this instance, the lender has the right to repossess the asset to recoup any funds lost.
This sounds scary but they tend to offer lower interest rates - and if you keep your repayments on-time then you have nothing to worry about.
Whereas an unsecured car loan does not require you to use any asset as security. In turn, you’ll find unsecured loans will likely have a higher interest rate as the lender is taking a bigger risk loaning you money. If you fall behind on your loan you might find the lender recoups their losses via taking you to court.
Pros and Cons of a Fixed-Rate Car Loan
Pros
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Security: Your repayment amount stays the same throughout the loan term—weekly, fortnightly, or monthly. Predictable repayments take the guesswork out of budgeting.
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Certainty: You can budget your household expenses knowing your car loan repayments won’t change.
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Protection: Should rates increase in the future, your repayments remain unchanged, potentially saving you money over time.
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Simple and transparent: If you’re a first-time borrower, a fixed-rate loan can be easier to understand as it offers consistent repayments and fewer unexpected changes compared to variable-rate loans.
Cons
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Limited flexibility: Many lenders don’t allow for redraw facilities or may charge high fees if you’re looking to pay out the loan early, refinance, or make extra repayments. For example, if you want to put a lump sum repayment from from your tax return onto the car loan, this may not be possible.
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Interest rates fall: If interest rates drop, you could be stuck paying more interest than a variable-rate car loan. In other words, you could miss out on a better deal - you may be able to refinance the loan, but this might come with fees.
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Break costs can be expensive: If ever you have to exit a fixed-rate loan early, say you’re refinancing, upgrading vehicles, or selling, it’ll trigger break fees which may be substantial.
What is a Variable-Rate Car Loan?
A variable-rate car loan has an interest rate that follows the market. It means your repayments could rise or fall over the loan term at the discretion of the lender. For example, you could find yourself paying $400 a fortnight at the start of the loan, to six months down the track, paying $450 as the lender has increased its variable rates.
This is why variable-rate car loans are more uncertain than fixed-rate loans as there’s no limit to how many times your repayments could change. This can make budgeting for your interest payments more difficult because you have to take into account potential rate rises.
However, variable-rate car loans do have appealing flexible features that may be too good to miss such as the ability to make extra repayments without incurring extra fees. Variable-rate car loans can also be secured or unsecured.
Pros and Cons of a Variable Car Loan
Pros
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Interest rate falls: Lenders may cut rates for a variety of reasons. If you’re on a variable rate, this means you’ll reap the benefits of lower repayments if market interest rates fall, saving you money over the life of the loan.
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Flexibility: Variable loans often allow for a wider range of repayments options including the ability to make additional repayments which could save you money over the life of the loan. It’s typically easier to adjust your repayment frequency, pay off the loan early, or refinance - without attracting hefty costs.
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More features and loan options - Lenders often bundle variable-rate loans with optional extras or flexible repayment structures, attracting borrowers with changing needs or irregular income.
Cons
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Exposure: Lenders can change a variable interest rate at any time. This means your interest rate -and therefore your repayments - can go up or down at any time during the loan term. If your lender increases the rate, you’ll end up paying more each month.
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Cash flow uncertainty: Harder to budget and make plans for the future as it’s impossible to predict when/if your rate will go up or down and by how much.
How to Compare Car Loans
Choosing which car loan you’re after - fixed or variable - is not a decision to make lightly as it could have a big financial impact down the track.
If you’re after predictability, a fixed-rate car loan may be the option for you. If flexibility is something you value, then a variable rate may be the right choice. The decision eventually rests on a thorough evaluation of your finances (current and future) and appetite for risk.
Before you apply for a car loan, consider the following:
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Interest rate - Determines how much your monthly repayments will be. The higher the rate, the more you will have to pay in interest over the life of the loan. Interest rates are generally lower for secured, variable-rate loans.
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Fees - Many car loans will have additional fees that you’ll need to pay on top of your interest and principal repayments. Fees will vary from lender to lender and may include application fees, early exit fees, ongoing fees, or redraw fees.
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Features - Some lenders may offer redraw facilities or allow additional repayments at no extra charge.
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Loan term - How long do you want a car loan for? A longer loan term will mean your monthly repayments are lower. However, you will end up paying more interest over the life of the loan. A longer loan may also mean that your car will continue depreciating while still under a finance arrangement. At the same time, it’s important to choose a loan term that isn’t going to put you in a tough financial position.
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Balloon payment - Is a feature where you agree to pay a lump sum at the end of your loan term, sometimes up to 30% of the purchase price. It can lower your repayments but could result in extra interest paid as you’re still borrowing against the full amount, and you might in for a big surprise at the end of your term if you’ve forgotten about it!
Here’s a side-by-side look at the key differences between fixed and variable rate car loans to help you make a more informed decision.
|
Feature |
Fixed rate loan |
Variable rate loan |
|---|---|---|
|
Interest rate |
Locked in for the life of the loan |
Can fluctuate over time |
|
Repayment amount |
Predictable and consistent |
Can change based on market rates |
|
Redraw facility |
Rarely available |
Often available |
|
Early repayment fees |
Often applies |
Less likely or lower fees |
|
Best for |
Budget-conscious borrowers who want certainty |
Borrowers comfortable with rate changes |
Browse the table below for an overview of the top car loan deals in the market right now.
