Fixed vs. Variable Rate Car Loans
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Are Car Loans Fixed or Variable?
How Do Fixed-Rate Car Loans Work?
Benefits of Fixed-Rate Loans
Availability: Fixed-rate loans are easy to come by and can be found through car dealerships, banks, credit unions, and online lenders. The more loan options you have to choose from, the better the chance that you’ll find one with a lower interest rate and favorable loan terms. Stability: With a fixed interest rate, you know exactly how much you’ll pay over the life of a loan. Fixed-rate loans may be ideal for car loans with long terms, since the longer the term of a loan, the greater the risk that interest rates might rise.
Cons of Fixed-Rate Loans
Opportunity cost: A fixed-rate loan doesn’t allow you to take advantage of falling interest rates. However, if rates drop, you could explore the idea of car loan refinancing, which might help you get a lower interest rate on a new loan. The fixed rate might be higher: A lender might charge a higher interest rate for a fixed-rate loan.
How Do Variable-Rate Car Loans Work?
Benefits of Variable-Rate Car Loans
Potentially lower rates: If the interest rates are lower when you take out a variable-rate loan, they might stay that way for a while. Repay your loan within that period, and you may never have to pay higher rates. And if interest rates fall, once your variable-rate loan readjusts, you may get a lower interest rate. Capped rates: Some variable-rate loans have an interest rate cap. That means your interest rate can’t continue to rise without limit. If this cap is similar to the rate you’d get with a fixed-rate loan, a variable rate may be worth considering.
Cons of Variable-Rate Car Loans
Volatility: Interest rates are usually based on a lender’s prime rate. If that rate rises, you may end up paying more on your loan. Changing rates can be hard to plan for in your budget. Initial rates may be fleeting: A lender may offer low introductory rates on a variable-rate loan to entice you, but those rates might not last for long. Once the introductory period is over, your interest rate may make a big jump up.
How to Choose the Right Car Loan for You
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