What is a variable-rate car loan?

Providing an extra layer of flexibility compared to their fixed-rate counterparts, variable-rate car loans are a type of personal loan bearing an interest rate that moves or ‘varies’ as changes to the market occur. These changes include two key factors such as increases to the cash rate by the Reserve Bank or increases in funding costs associated with providing loans.

Typically there are two types of variable rate car loans that exist in the market - secured and unsecured loans. With a secured car loan, a bank or lender requires an asset - in this case, the car - to be utilised as security against the loan. This means that if you fail to meet your repayments, the lender has the right to sell or repossess the asset in order to recuperate its funds. Because of this, secured car loans often have lower interest rates, as the borrower is deemed to be less of a risk to the lender. 

Unsecured car loans, as the name suggests, do not require a security meaning the lender has no claim to your assets in the event of non-payment. These loans tend to come as a greater risk to the bank or lender given there is no security backing the loan, meaning interest rates on unsecured loans tend to be higher.

How to compare variable rate loans

In order to ensure you are getting the best possible deal on a variable rate car loan, there are a number of factors to consider. These include:

1. Advertised interest rate

The first and most obvious factor when comparing variable rate car loans is the interest rate offered. The higher the interest rate, the more interest you will pay over the life of your car loan, and the higher your base repayments will be. While the rate may be variable in nature, it’s a key factor to consider as it provides an understanding of the competitiveness of the product.

Be wary of any car financing product displaying repayment figures only - they are next to meaningless without seeing the interest rate and loan term.

2. Comparison rate

Alongside the advertised rate, banks and lenders are obligated to advertise the comparison rate of the variable rate car loan. This provides a greater indication of the true cost of a car loan by bundling the interest rate plus various fees into a single percentage figure.

For example a variable rate car loan may have an advertised interest rate of 6.99% p.a. with a comparison rate of 8.99% p.a. This indicates there is two percentage points' worth per annum of fees to consider.

3. Fees and costs

While some variable rate car loans may present enticing facades with low interest and comparison rates, sometimes looks can be deceiving. Banks and lenders may charge an array of fees or tack on associated costs to your variable rate car loan so it's important to look out for these when comparing your options.

Keep an eye out for fees such as loan establishment fees, late fees, break fees, exit fees, extra repayment fees, or ongoing repayment fees. Your hip pocket will thank you the lower the amount of fees or associated costs.

4. Features

Variable-rate car loans can offer specific features for borrowers including the ability to make extra repayments with a redraw facility to help you pay off your loan sooner and save you interest. However, not all banks and lenders will offer the same features making it important to do your research and compare products to help you make an informed variable rate car loan decision. Further, these features might not be necessarily free.

5. Loan term

When it comes to how long you can have a variable-rate car loan for, there is no right or wrong answer - it ultimately comes down to your financial position and ability to sufficiently make repayments on an agreed basis. Generally banks and lenders can offer variable rate loan terms ranging from one year to ten years.

The most popular terms tend to be from three to five years, as this offers many motorists a budget-friendly level of regular repayments and a palatable amount of total interest paid.

Typically the longer your loan period, the less you will be required to pay each week, fortnight or month, yet this means you will pay more in interest over the life of your loan. It’s important to choose a loan term with a repayment schedule that isn’t going to put you in a tough position financially - you never know, you may be able to repay your loan sooner down the track anyway!

Benefits and drawbacks of a variable-rate car loan


  • Lower interest rates: Variable rate car loans offer a potential advantage of lower interest rates, as some banks or lenders may be willing to provide such loans at a reduced rate as an incentive for borrowers to utilise their product.

  • Flexibility: Additionally, the flexibility of variable rate car loans is enticing for borrowers, providing the ability for extra repayments, repayment frequency adjustments, early loan repayments, or refinancing compared to fixed contracts.


  • Fluctuating interest rate: One of the main drawbacks of a variable rate car loan is the uncertainty associated with interest rates. Additionally, if the interest rate rises significantly, you may end up paying more in interest charges over the life of the loan than you would have with a fixed rate loan. In the early days of a loan, a much higher proportion of your repayment goes towards interest, so a rising interest rate could be detrimental to your equity.

  • Budget uncertainty: If interest rates rise, your monthly loan repayment amount also increases over time which can be challenging to budget for. If you’ve been repaying extra. This is unlike a fixed-rate loan, which can be more stable to budget around.

Always read the terms and conditions of the loan, as different loans may have different policies towards things like extra repayments or early exits.