Is A Fixed Rate Car Loan Better?

January 10, 2024

Are you a car enthusiast and a savvy borrower? If so, you are in the right place! Today, we’re diving into a topic that hits close to home: car loans.

You’re eyeing that dream car, and the excitement is real. However, before revving the engine, you must decide between fixed and variable interest rates.

Here, we’ll discuss the perks of fixed rates and how a car loan works. After reading, you will discover why many borrowers prefer fixed-rate car loans over variable ones.

So, let’s get started!

What Is a Fixed Interest Rate Car Loan?

What Is a Fixed Interest Rate Car Loan?

A fixed-interest rate car loan is known for the stability of its interest rate throughout the entire duration of the loan repayment. Unlike variable-rate loans, the interest on fixed-rate car loans remains unaffected by lending or repo rate fluctuations.

The equated monthly instalments (EMI) for fixed-interest rate car loans remain constant over the loan tenure. The loan terms usually last 36 to 84 months. These loans are readily available through various channels, including car dealerships, banks, credit unions, and online lending platforms.

The interest rate stays constant irrespective of market conditions. So, the loan term maintains a fixed EMI. This provides a structured financial framework for easier monthly budgeting and informed decision-making.

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How Fixed-Rate Car Loans Differ from Variable-Rate Loans

Fixed Rate vs Variable Rate Car Loan

The main difference between fixed-rate and variable-rate car loans is how the interest rates and repayment schedules work.

Simply put, deciding between the two depends on what you prefer and how much risk you’re okay with. If you like things to stay steady, you might choose a fixed-rate loan.

If you’re comfortable with changes and uncertainties, you might want to consider a variable-rate loan. Now, let’s look at the main differences between these two kinds of loans:

Interest Rate

  • Fixed-Rate Car Loan: Maintains a consistent interest rate throughout the entire duration of the loan repayment.
  • Variable-Rate Car Loan: Its interest rate can change over time. Prime rate or other benchmarks usually influence this.

Repayment Schedule

  • Fixed-Rate Car Loan: It has a predictable repayment schedule, with equated monthly instalments (EMI) remaining constant throughout the loan term.
  • Variable-Rate Car Loan: This entails an unpredictable repayment schedule, where EMIs may change in response to fluctuations in the interest rate.

Risk Considerations

  • Fixed-Rate Car Loan: Ideal for those seeking security and predictability. Monthly payments remain constant, offering assurance and eliminating surprises associated with interest rate changes.
  • Variable-Rate Car Loan: Appeals to individuals who prioritise flexibility and possess the financial capacity to make occasional additional payments. This flexibility could lead to early loan repayment and reduced overall interest payments. However, there’s a risk that the interest rate might go up and down.


  • Fixed-Rate Car Loan: Widely available through diverse channels such as car dealerships, banks, credit unions, and online lenders.
  • Variable-Rate Car Loan: Relatively rare and typically found in specialised lending institutions or banks in other countries.

Pros and Cons of Fixed-Rate Car Loans

Pros and Cons of Fixed-Rate Car Loans

Before you fully consider getting fixed-rate car loans, here are some pros and cons:


Predictable monthly payments

Fixed-rate loans usually have consistent monthly payments throughout the loan duration. Every payment includes both the borrowed principal amount and the interest. Initially, a larger part of the payment goes towards interest.

However, as you make payments, more of it goes toward the principal. This setup means you pay less interest over time, which is a significant benefit.

Protection against interest rate fluctuations

Interest rates change based on supply and demand. People who don’t want their interest rates to change during their loan prefer fixed interest rates. The interest rates for variables can change unexpectedly based on some benchmarks. Meanwhile, fixed rates stay the same, preventing unwanted mortgage payment additions.

Long-term financial stability

Fixed-rate loans are like having a steady plan for your money. You know exactly how much you’ll pay monthly throughout the loan. This helps you budget and gives you the confidence to make other money decisions.

For example, if you have a fixed-rate car loan and know your payments won’t change, it’s easier to figure out your budget for things like saving for school or buying a home.

Cons of Fixed Interest Rate Car Loans

Potential for higher initial interest rates

Fixed rates are usually more expensive than adjustable rates. Loans with adjustable rates often start with lower rates than fixed-rate loans. This makes adjustable-rate loans more attractive when interest rates are high.

Limited benefit if interest rates decrease

If interest rates decrease, someone with a fixed-rate loan won’t enjoy the lower rates.

They keep paying the same fixed interest rate they agreed to. This means they might not save money even if overall interest rates in the market drop.

For example, let’s say you have a fixed-rate car loan at 5%. If interest rates in the market fall to 3%, you won’t benefit from the lower rates – you still pay 5%.

Possible prepayment penalties

Prepayment penalties are charges that lenders might ask for if you pay off your loan early before you’re supposed to.

Some loan agreements have a prepayment penalty clause, making it more expensive to refinance your next car.

This penalty can be a percentage of what’s left on your loan or a fixed fee, depending on when you decide to pay it off.

These penalties are more common with loans for people with bad credit, loans from sub-prime car loan lenders, or from ‘buy-here, pay-here’ dealerships.

The borrower needs to check their loan agreement to see if there are any prepayment penalties before deciding to pay off the loan early.

Factors to Consider Before Choosing a Fixed-Rate Car Loan

Choosing a Fixed-Rate Car Loan

Personal financial goals

Before deciding on a fixed-rate car loan, consider how well the loan fits your financial situation. Look at your bigger plans, like saving for a home, making an emergency fund, or handling any money you owe.

Here’s a checklist before opting for a fixed car loan:

  • Check your budget to see how much you can put towards your car loan without straining your budget for savings and paying off debts.
  • See how the fixed-rate loan fits into your long-term money plans. Check if the monthly payments and the total cost of the loan match your money strategy and help your overall financial health.
  • Ensure a fixed-rate car loan won’t affect your savings for emergencies. Also, consider how the loan fits into your overall plan for dealing with money you owe, especially if you have other debts.
  •  Determine if a fixed-rate loan stays the same always, works well for you, or if you prefer a loan where the rates can change.

Economic trends and interest rate forecasts

The person getting the fixed-rate loan should look at how the economy is doing and what experts expect to happen with interest rates. This helps them decide if a fixed-rate car loan is the right choice. If people expect interest rates to decrease, a fixed-rate loan might not be the best because they could miss out on saving money.

Yet, if experts anticipate a rise in interest rates, opting for a fixed-rate loan might be more advantageous. This protects borrowers from fluctuations in interest rates.

You should also check how much other lenders are charging for car loans. Then, compare different offers to find the lowest rates before deciding.

Comparison rate

A comparison rate provides a clearer picture of the overall cost of a loan by considering factors beyond the interest rate. These include the loan amount, the loan duration, how often you make repayments, and any associated fees and charges.

For example, a loan might have a low-interest rate. However, if it comes with high fees, the comparison rate could be higher than a loan with a slightly higher interest rate but lower fees.

When looking for a loan, the comparison rate offers Australian borrowers a more accurate way to understand the loan’s actual cost.

It helps you compare different loan options more effectively because it considers all the essential elements contributing to the overall expense.

Comparison rates apply to loans with a fixed repayment term and don’t include lines of credit like flexi loans. Too many variables with flexible credit arrangements make providing a standardised comparison rate challenging.

Comparing Fixed Rate vs. Variable Rate Car Loans

Key differences in interest rate structures

When you compare fixed-rate and variable-rate car loans, the main differences are in how the interest rates work.

Fixed-rate loans give you a steady interest rate throughout the loan period, providing stability. This means you’ll have consistent and predictable monthly payments, which makes budgeting easier.

Also, fixed-rate loans protect you from changes in the market that could lead to higher interest rates, which is helpful in uncertain economic times.

On the other hand, variable-rate car loans have an interest rate that can change based on market conditions.

These loans usually start with lower initial interest rates than fixed-rate loans, which is better when overall interest rates are low.

However, there’s a risk of the interest rate going up in the future, leading to changes in your monthly payments.

Conversely, if market rates go down, you might benefit from lower interest costs.

Deciding between fixed and variable rates depends on your personal preferences, how much risk you can handle, and the current economic situation.

Impact of market conditions on variable rates

Borrowers should check current economic trends and forecasts to determine the suitability of a fixed-rate or variable-rate car loan.

Variable interest rates fluctuate because they are tied to a benchmark interest rate or index that shifts along the market.

Imagine you have a variable-rate car loan linked to the federal funds rate. Initially, your car loan has a relatively low-interest rate because the federal funds rate is historically low. This makes your monthly car payments affordable.

Suppose economic conditions change, leading to an increase in the federal funds rate. This might happen due to a stronger economy or the central bank’s decision to raise interest rates to curb inflation.

As a result, your variable interest rate for the car loan would also go up. Consequently, your monthly car payments would increase, potentially putting more strain on your budget.

Conversely, if economic conditions lead to a decrease in the federal funds rate, your variable interest rate would go down. In this case, you would benefit from lower monthly car payments.

Choose the right option based on individual preferences

For some people, it feels good to know exactly how much they’ll pay every month without stressing about interest rates going up. This sense of comfort is a big reason people might choose a fixed-rate loan.

On the other hand, if you’re okay with a bit of risk and plan to pay off your loan fast, a variable-rate car loan could be okay. Again, these loans are riskier because the interest rate can increase, and you might pay more than you thought.

Tips for Getting the Best Fixed-Rate Car Loan

Tips for Getting the Best Fixed-Rate Car Loan

1. Research and compare lenders

Before getting a car loan, the borrower must check their credit score. They need to understand what information lenders see about them and how it can impact their loan terms.

Various lenders, including banks, credit unions, captive lenders, and online lenders, use the borrower’s credit report to determine their loan terms.

Aside from checking their credit, borrowers should budget carefully and negotiate with lenders to secure the best possible deal for their car loan.

Negotiation can involve discussing interest rates, loan terms, and additional fees.

For those in Australia, several car loan lenders are available:

  • Ausloans Finance Group: Offers commercial and consumer car loans with a large lending panel in Australia.
  • Canstar: Provides a list of car loan providers in Australia, including well-known institutions like ANZ, Bankwest, Bendigo Bank, and Commonwealth Bank.
  • RateCity: Allows borrowers to compare car loans across Australia, with rates starting from 4.99%.
  • iSelect: Compares various car loan providers and their products, including options from Australian Unity, Bank Australia, Bankwest, and more.
  • Stratton Finance: As Australia’s leading financial broker, they provide business loans for cars, boats, and other vehicles.

2. Negotiate terms and conditions

It can be hard to manage your money if you have a big car loan or a high-interest rate. When you’re buying a car, take your time. If you can negotiate your car loan, you can ask for what you need and maybe pay less.

Don’t let the car dealership confuse you. You’re the one buying the car, so you’re in charge.

You can discuss many things with the lender who gives you the car loan. It might seem scary, but learning how to talk about it can be advantageous:

  • Pay Less Overall: If you can get the car’s price down by $2,000, that’s $2,000 less you have to pay back, and you’ll also pay less interest.
  • Get Added Benefits: Sometimes, the dealer might give you extra benefits for free, like extended warranties or free maintenance services, just to make their offer better.
  • Pay Less Interest: If you find a lower interest rate when you look at different lenders, you could pay less interest over the time you repay the loan. This could save you a lot of money over a few years.

3. Show a positive payment history

Lenders usually want to see that the person borrowing money for a car will repay what they owe on time. This payment history is an important part of the borrower’s credit score.

To have a good payment history, the borrower must always make their payments on time and not miss any. They can also think about setting up automatic payments so they never forget to pay.

Having a good payment history can make the borrower’s credit score better. This can increase the chance of getting a car loan with a lower interest rate.

4. Don’t apply unless committed

If you apply for multiple car loans simultaneously and end up with a poor credit score, it can make it more difficult for you to borrow money in the future.

To avoid this, you should only apply for a car loan when you are sure of buying a car and have researched. You should also know how much money you can spend and pick a loan that fits your financial goals.

5. Get financial advice

Financial advisors can help you on your journey to finding the right car loan.

They’ll help you understand your finances, plan your budget, and make sense of your credit score. When talking to lenders, they ensure you get the best deal that fits what you want for your financial plans.

They will thoroughly explain all the loan details so you know exactly what you’re getting into. With a financial advisor on your side, you can be confident about getting a car loan that suits your financial goals.

Frequently Asked Questions (FAQs)

Are Fixed-Rate Car Loans Always the Better Option?

Fixed-rate car loans offer stability with constant interest rates, which is great for budgeting. However, they might have slightly higher initial rates than variable ones. Choosing depends on your preferences and the economic situation. If you value predictability, a fixed rate could be your best bet.

Can Fixed-Rate Loans Save Money in the Long Run?

Fixed-rate loans provide stability with consistent interest rates, making budgeting easier. While initial rates might be slightly higher, they shield you from market fluctuations. This stability can save money over the long run, especially if interest rates rise.

How Does One Qualify for a Fixed-Rate Car Loan?

To qualify for a fixed-rate car loan, you generally need a good credit score, a stable income, and a favourable debt-to-income ratio.

Your likelihood of securing a fixed-rate car loan with favourable terms increases with a strong credit history and a reliable income stream. Lenders evaluate your financial stability to assess the associated risk.

How Can One Refinance a Fixed-Rate Car Loan?

Refinancing a fixed-rate car loan involves researching and selecting a new lender offering better terms. Check your credit score, gather the necessary documents, and apply with the chosen lender. If approved, the new loan pays off the existing one. This potentially leads to lower interest rates or more favourable repayment terms.

What Is the Typical Duration of a Fixed-Rate Car Loan?

The typical duration of a fixed-rate car loan is often 36 to 72 months. Borrowers can choose a repayment term that aligns with their budget and financial goals. Shorter terms usually have higher monthly payments but lower overall interest costs. Meanwhile, longer terms offer lower monthly payments but may accrue more interest over time.

Can One Pay Off a Fixed-Rate Car Loan Early?

To settle your car loan quickly without facing financial penalties, seek a loan without early exit fees. Paying off your loan early on schedule or making extra repayments can lead to interest savings. Mad Finance is an example of a car loan lender that doesn’t impose exit fees.

Are Fixed-Rate Loans Available for Used Cars?

Fixed-rate loans are available for both new and used cars. They offer stability with a constant interest rate throughout the loan term.

Whether you’re eyeing a shiny new ride or a reliable used car, you can find fixed-rate loan options and personal loans to suit your budget and financial preferences.

What is an Australian Credit Licence?

An Australian Credit Licence (ACL) is a legal authorisation issued by the Australian Securities and Investments Commission (ASIC).

Individuals or entities need this license to engage in credit activities, such as providing loans, leasing, or offering credit assistance.

Holding an ACL ensures compliance with the credit industry’s regulatory standards and consumer protection measures.

Final Take on Fixed Rate Car Loans

Fixed-rate car loans offer stability and predictability, making them a solid choice for those prioritising consistent monthly payments.

While they may have slightly higher initial rates, the assurance against market fluctuations and the potential for long-term savings make them a noteworthy option for long-term financial planning.

In wrapping up, it’s clear that deciding on whether a fixed-rate car loan is the better option depends largely on your personal financial situation and your future plans. However, if stability, predictability, and safeguarding against potential interest rate hikes sound appealing to you, then a fixed-rate car loan might just be the way to go.

But here’s the kicker – you’re not in this alone. Mad Man Motors and Mad Finance have got your back. With our extensive range of the best car loan options in Perth, we’ve made it our mission to ensure you find the perfect match for your needs, even if your credit score isn’t exactly brag-worthy.

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