When you borrow money to buy a car you may have the option of choosing a fixed- or variable-rate loan. So which is better? It depends on several factors including your credit score how long you plan to keep the car and your personal preferences.
Fixed-rate loans are just that: The interest rate stays the same for the life of the loan which is typically three to five years. That means your monthly payment will stay the same too.
Variable-rate loans have an interest rate that can fluctuate over time. The monthly payments on a variable-rate loan may go up or down depending on the current interest rate.
If you have good credit you may be able to qualify for a low interest rate whether it’s fixed or variable. But if your credit isn’t great a variable-rate loan could start out with a higher interest rate than a fixed-rate loan.
One benefit of a variable-rate loan is that the interest rate could eventually go down which would lower your monthly payments. But there’s also a risk that the interest rate could go up which would increase your monthly payments.
If you plan to keep your car for a long time you may be better off with a fixed-rate loan. That’s because even if the interest rate on a variable-rate loan goes down your monthly payments could still increase if the loan term is longer than the time you plan to keep the car.
Another thing to consider is that some lenders offer loans with no down payment or a very low down payment. That could be tempting if you don’t have a lot of cash on hand. But remember the more you borrow the more you’ll have to pay in interest and the longer it will take to pay off the loan.
Before you decide on a loan be sure to shop around and compare rates from multiple lenders. And make sure you understand all the terms and conditions of the loan before you sign on the dotted line.
Is an auto loan variable or fixed rate?