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Fixed Rate Auto Loans: Pros and Cons
Car financing includes both variable rate and fixed rate loans. Auto loan rates are defined as the interest that is charged for a loan you take out to purchase a new or used vehicle. The interest rate compounds from the money you borrow. Car loan terms vary widely depending on both market conditions and the financial state of the buyer. A smart buyer will look for a low rate car loan, preferably the lowest. When choosing a car loan, look at the advantages and disadvantages of both fixed rate and variable rate loans. Only then should you decide which one is right for you.
Fixed Rate Loan Advantages
The main advantage of a fixed rate loan is that the interest will not fluctuate at any time during the life of the loan. In other words, if you get an interest rate of 6.5% on your car loan, even if market conditions drive up the average rate to 7.5%, your interest rate will stay put. By accepting a fixed rate loan, you are securing that rate until you pay off the loan.
Disadvantages of a Fixed Rate Loan
On the other hand, if market conditions are such that the loan agent can offer you a variable interest rate that is 1% or more less than the fixed rate, it may be wise to take it. That is the primary disadvantage of a fixed rate loan. The fact that you could be missing out on a good deal. The danger is, of course, that the low rate could adjust upwards, but if you can get a 4% variable rate or a 6.5% fixed rate, the variable rate is the way to go. Variable rates often come with a ceiling above which it cannot go. If the ceiling is not much higher than the fixed rate available to you, it is disadvantageous to take the fixed rate.
Before signing on the dotted line, look into your options and understand the differences between fixed rate and variable rate auto loans. In most cases, a fixed rate loan will be the better choice because it does not fluctuate with the market rates. However, if interest rates are low, you might find a deal you cannot pass up with a variable rate.
