Where car loan terms are concerned, variable rate auto loans are among the most attractive offers. This type starts as a low rate auto loan, with an interest rate that is often below what you might be eligible for. As time passes, however, the interest rate rises, along with your monthly payment and the total amount you will pay on the loan. Although you get one of the best car loan rates initially, after the interest rate rises, it becomes less favorable. Variable rate auto loans have largely replaced 0% auto loans on the market as one of the more enticing loan packages. Getting a car loan is a matter of looking into your options, understanding each of them and deciding which one offers terms that are both favorable and reflective of your ability to repay.
You have to be careful when considering getting a variable rate auto loan. They can offer quite an attractive set of terms at first, but the interest rate could be set to skyrocket in a year or two. A variable rate auto loan might start a little above 0%. After time, the rate will change, going up. Sometimes it will hit a ceiling as stipulated in the contract. In other cases it will not, which means an interest rate of 1.3% could rise to 10.3%. Suddenly you find yourself with car payments that are beyond your means, and you’ll be paying on a loan that has turned sour overnight.
If you’re intrigued by the idea of a variable rate auto loan, take the time to look for one that has a great starting interest rate. When you are discussing the loan terms with the agent, be sure to ask about the interest rate ceiling. If there is none, it’s advisable that you walk away from that loan and find another. Assuming you can find one that has a ceiling of, say, no more than 5% added to the original rate, that’s your loan.
The best way to repay a variable rate auto loan is to frontload the payments. If possible, increase the size of your monthly payments while the interest rate is at its lowest. After the rate goes up, you will have paid down a large portion of the principal. Thus, despite the raised rate, the interest charges won’t be quite as severe because there is less of the loan left to accrue interest. This strategy may not be possible for every borrower. Many are attracted to the variable rate auto loan in the first place because it allows for very low payments in the beginning. That is the trap, though. The payments will get more and more burdensome as time goes on.
If you want a variable rate auto loan, search around for one that places a ceiling on the interest rate. Some variable rate auto loans have no ceiling, and the interest rate can subsequently rise by double digits. Avoid this by inquiring about a rate ceiling and walk away if one is not in place. If you do take on the loan, try to pay more while the rate is low, so your payments won’t be as burdensome after the rate goes up.