Should you sign up for predictable monthly repayments?
Found the car you want to buy? Whether it’s new or used, you can find a low rate that stays low for the life of your loan term when you opt for a fixed-rate car loan.
Read our guide and compare your options to learn more about fixed rate car loans.
How do fixed-rate car loans work?
Fixed-rate car loans work by giving you an interest rate that stays the same over the life of your loan. This gives you the predictable monthly repayments that don’t change and are easier to budget ahead of time.
The alternative to a fixed-rate car loan is a variable-rate car loan. These come with repayments that can go up or down depending on the lending market. Variable rates have the potential to go lower or higher than a fixed rate and come with less-predictable daily repayments.
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What are the different types of fixed-rate car loans?
There are two types of fixed-rate car loans: secured and unsecured.
- Fixed-rate secured loan. With a secured fixed-rate car loan, the lender will use your vehicle as collateral for the loan. This means that if you default on your loan, the lender can repossess your car. These loans generally come with lower rates as they are a less of a risk for the lender.
- Fixed-rate unsecured loan. An unsecured fixed-rate car loan means you won’t have to use your vehicle to secure the loan. The loan is more of a risk for a lender, so you’ll likely pay a higher APR. But unsecured loans offer the flexibility to use your loan amount for anything you may need.
Watch out for precomputed interest
Some loans come with a fixed amount of interest that you’re required to pay no matter how long to pay off your loan. With precomputed interest, you won’t be able to save on your loan by paying it back before it’s due, unless your contract mentions a rebate or refund for early repayment.
Not all fixed interest loans come with precomputed interest, however. With simple-interest loans, your interest adds up over time and you can pay it off early to save.
Benefits and drawbacks of a fixed-rate car loan
- Easier to budget. Fixed repayments can help you budget throughout your loan term.
- Lock in a competitive rate. You don’t have to worry about your interest rate increasing over the life if your loan.
- Predict your total loan cost. Since you know what rate you’ll have from start to finish, it’s easier to compare the cost of fixed-rate loans.
- Can be higher than a variable rate. You won’t be able to take advantage of lower variable rates if the market changes.
- Potentially less savings. If a variable rate stays lower than fixed rates the whole time you’re paying off your loan, you could end up paying more in interest on a fixed-rate loan.
3 mistakes to avoid when borrowing
Although a fixed-rate car loan can offer benefits, consider the following before you commit to a loan:
- The fine print. Lenders can get sneaky and hide fees, conditions and other charges in the fine print. Make sure you read and understand the loan you’re signing onto.
- Early repayment fees. There may be early termination fees or early payoff penalties attached to a fixed-rate car loan.
- Car ineligibility. Make sure the car you’re planning on purchasing is eligible under the terms of the loan. Most lenders will set maximum age limits on used cars and want the car you choose to be in good condition.
How do I find the right lender?
- Pick your car. Start by researching your vehicle options. You won’t get accurate terms until you know how much you’re spending, the car you’re buying and who the seller is.
- Find a lender. Once you’ve narrowed down your car search, it’s time to find a lender. Look at banks, credit unions and online lenders to start the comparison process. It’s important to compare the fee structure, interest rate and other features offered by different lenders in the market so you can find the loan that suits your financial needs.
- Determine your budget. Longer loan terms mean lower monthly payments, but will cost more in the end. Having a large down payment can also help lower your interest rate since you’ll borrow less.
- Apply. Submit an application once you’ve found a lender with decent fixed-rates and reasonable loan terms. You may have to fill out multiple applications at once, and your approval depends on your credit and how much you can afford to borrow. To save time, consider using a broker that can connect you with multiple options.
A fixed-rate car loan is a good option if you want to lock in your interest rate. You’ll know exactly how much you owe each month, how much the loan will cost you and have a list of all the fees your lender could charge. Don’t forget to learn more about car loans, and always compare your rates to find the best option for you.
Frequently asked questions
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