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. Here are some of the differences between the two.
A fixed rate auto loan is one where the interest rate does not change. That means that a potential borrower can use a loan calculator to see the duration and total amount he/she is to pay, according to specified auto loan rates.
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 percent on your car loan, even if market conditions drive up the average rate to 7.5 percent, your interest rate will stay put. By accepting a fixed rate loan, you are securing that rate until you pay off the loan.
On the other hand, the primary disadvantage of a fixed rate loan is that you could be missing out on a good deal when it arises. Of course, a low variable rate could adjust upwards but if you can get a 4 percent variable rate compared to a 6.5 percent 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.
With variable rate auto loans, the interest rate on the loan can change according the U.S. prime lending rate. Although some variable rate loans have attractive aspects for many buyers, some financial experts counsel against taking a loan that is tied to the current market rates. In general, a variable rate loan can be beneficial according to what happens during the time period of the loan, but for those who are looking at a specific monthly payment, a fixed rate loan may be a safer bet.
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.