What is a variable rate car loan?
If you’re looking for a flexible car loan, you might want to consider a variable rate car loan. A variable rate means that your repayments will change depending on whether the lender raises or lowers their interest rates.
A variable rate loan is a loan whose interest rate fluctuates (or “varies”) with changes in the market. This means your interest rate can go up or down over the life of your loan.
Variable auto loans also often have attractive features like the ability to make additional payments with an offset account (often at no additional cost) to help you pay off your loan sooner and save you interest.
Variable rate loans are more uncertain than fixed rate loans. This can make it difficult to budget for your interest payments, as you need to factor in potential rate hikes. If you are unprepared, you may find it difficult to keep up with refunds.
Advantages of variable rate auto credit
The main potential benefit of a variable rate car loan is the possibility that you end up paying less interest at a lower rate than your loan’s starting rate. Although you can start paying off your auto loan at the advertised rate, your repayments will decrease if the lender lowers their interest rates.
Another benefit of variable rate auto loans is that they often offer flexibility. Most fixed rate auto loans will have penalties for changes in repayment frequency, additional repayments, or lump sums. With a variable rate, you can often change your repayment frequency (eg fortnightly to monthly) and afford to pay off part of your loan if you can. This flexibility allows you to adapt your reimbursements to your situation.
With a variable rate auto loan, if the lender lowers interest rates, you can choose to add those extra savings to your auto loan and get your payments ahead of time. This can help you get closer to paying off your car loan in full sooner than expected and reduce the total interest you’ll have to pay over the life of the loan.
Another benefit that often accompanies a variable rate car loan is ease of withdrawal. A withdrawal facility allows you to withdraw any extra money you pay on your car loan beyond the repayment schedule. This can help you move forward on the loan by making additional repayments.
Disadvantages of variable rate auto credit
The main disadvantage of a variable rate loan is the possibility that interest rates will increase over the life of the loan, thus increasing your repayments compared to the original rate. This is a risk you need to consider because a prolonged period of rising rates could put you under significant financial stress if you cannot keep up with rising rates.
Always read the terms and conditions of the loan, as many variable rate loans may charge you additional fees for additional repayments or early exits.
Why do interest rates change?
An interest rate is the cost of a loan. The lender charges interest as insurance against the possibility of a borrower not being able to repay the money, as compensation. It helps keep the economy moving by encouraging lending and spending money.
The reason they may rise or fall is a result of this supply and demand for credit. An increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will lower them. On the other hand, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them.
When you take out a variable rate loan, you take the risk of riding those highs and lows.