If you are planning to buy a car, then you have probably considered getting a car loan. After all, cars do not really come in cheap. There are two kinds of car loan that you can avail, the fixed rate car loan and the variable rate car loan.
Nowadays, financiers only offer fixed rates, however, there are still some financiers that can offer variable rate car loans. So, what are their differences?
The Variable Rate Car Loan
A variable rate car loan has a better early payout, however, it gives no certainty in what your repayments are going to be in the length of your loan term. This kind of loan ensures that the financer will not lose out in the case that the interest rates or their own economic conditions change.
Due to some changes, lenders no longer adjust their rates according to the Reserve Bank of Australia or the RBA interest rate movements. Lenders offering variable rate car loans often apply variable interest rates at their own discretion. This means that, generally, they do not pass on rate cuts, or increase rates independently of the RBA.
Its upside of getting a variable rate car loan only the fact that they can give you a great early payout. However, you are going to have to live with the uncertainty of your repayment or interest rate throughout your loan term. There is no guarantee of how many times your interest rate might change.
The Fixed Rate Car Loan
Budgeting is easier with a fixed rate car loan. Your interest rate is fixed throughout your loan term and your repayments are the same from start to finish. It is possible to get early payout penalties when getting a fixed rate car loan, but they are usually not major penalties. The early payout penalty is a small price to pay for the certainty of knowing your interest rate and repayment in the long run.
Generally, lenders will allow you to make additional repayments whether you are getting the fixed or variable rate car loan. Doing so will help in reducing the total amount of interest payable over the term of your loan. This is because interest is calculated on the daily balance.
If you get a fixed rate car loan, getting ahead of your repayments still means that your repayment will stay the same as the original contractual agreement. But you will be able to reduce the term of your loan which will also save interest.