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How Variable Rate Auto Loans Work
Getting variable rate loans can save you some money when you first get your new car but the savings depend on the loan’s term and what the current prime rate is. If the prime rate is on an upswing, variable rate auto loans can be expensive. By following the tips in this guide, you have a much better chance at getting a good rate on your car loan.
How Variable Rate Auto Loans Work
As their name implies, variable rate car loans usually begin with a low introductory interest rate. The loan’s interest rate fluctuates as the prime rate does (most variable rate loans will be at prime, plus a few extra points); in some cases the interest rate can go up as much as 10 percent. These loans save you money when the prime rate isn’t moving much but if it goes up sharply, so will your loan payment. This type of auto loan has largely replaced zero percent auto loans.
It Pays to Shop Around
As is the case with any other loan, comparison shopping is the key. There are so many sources for car loans, both in person and online, and you should get quotes from a variety of lenders to ensure that you are getting the best rates possible. If you’d like, you can visit insweb.com to get fast, no-obligation quotes from a variety of lenders. Often, credit unions are excellent sources of low-interest loans, so you should check there as well.
It’s Important to Read the Terms and Conditions Carefully
When you’re comparing loans and getting quotes, carefully read the loan agreement’s terms and conditions. Most variable rate loans will have an upper limit that interest rates can reach but there are loans available that have no interest cap. Stay far away from these because you are vulnerable to rapidly rising interest rates. You need to know how often the loan’s rate adjusts itself and the cap on interest rate increases. Knowing those two pieces of information can save you thousands of dollars over the life of the loan.
Variable rate car loans are beneficial if the starting rate is well under what the fixed rate would be. Check also to see if there is a time frame in which you will pay the low rate. It may last a specific amount of time and when it passes, provided there is equity in the car, you may be able to refinance.
Offer a Bigger Down Payment and Check Your Credit
If you can afford to do so, consider offering a larger down payment (or you can use your current vehicle as a trade-in). In the lender’s perspective, a customer that makes a bigger initial investment is less likely to default on a car loan. Also, knowing your credit score can mean the difference between getting a good rate and a poor one. If your credit score is below 600, you are declared “subprime” and you will have a much harder time getting a loan. To increase your chances of getting the loan you need, start cleaning up your credit about six months before you begin looking for financing.
Variable rate loans carry with them a bit of risk and uncertainty, so make sure that you understand all the terms and details of the loan. Knowing exactly what you’re getting into can keep you from signing on a loan you can’t afford to pay.
