What is a fixed rate car loan?
A fixed interest rate car loan is a loan with the ability to lock in (or “fix”) your interest rate for a set period of time (usually between one and five years). One of the main advantages of this solution is the certainty of cash flows. By knowing exactly what your repayments will be, you’ll be able to plan ahead and budget for the future.
A fixed rate means you won’t be hit with an unexpected increase in repayments if interest rates rise. This often makes budgeting easier, as your repayments will stay the same for the set term.
Advantages of a fixed rate car loan
The main advantage of a fixed rate car loan is security. By “fixing” your loan for a certain period of time, you know what your repayments will be each week/fortnight/monthly payment. For those on a strict budget, a fixed auto loan allows you to have consistent repayments. Another advantage of a fixed rate auto loan is that you may be able to “lock” your interest rate at a low rate. If interest rates rise during the fixed term, you will not be affected and you will continue to pay at the lower rate.
Disadvantages of a fixed rate car loan
The main disadvantage of a fixed rate car loan is the possibility of paying higher interest than a variable rate. If your lender’s interest rates drop during the fixed term, you will be obligated to pay the higher rate. Also, many lenders do not allow additional repayments or modified repayments during the fixed period. This means that if your situation changes and you wish to increase the amount or frequency of your repayments, this may not be possible during the fixed term.
What are the types of fixed rate car loans?
There are two types of fixed rate auto loans, secured and unsecured.
A secured car loan is a loan where an asset (the car you buy) is used as collateral against the loan. This means that in the event that you fail to meet your repayments, the lender has the right to send the pension men to withdraw the asset from you in order to recover their funds.
Secured loans are the most common type of loan. A secured car loan is essentially the same as a home loan, with the car you buy being used as collateral. With a home loan, the home purchased is the collateral for the loan. If you don’t meet the repayments, the lender has the right to take the house from you and sell it.
As you might have picked up from the “no” in the name, unsecured car loans don’t require you to use your car as collateral. They don’t force you to use whatever as a security, which naturally represents a much higher risk for them. If you were to have financial difficulties or go out of the network, the lender will have to sue you in order to recover their money. For this reason, they are essentially the same thing as a personal loan.
To compensate for this risk, lenders offering unsecured auto loans will generally charge a higher interest rate, more fees, and are unlikely to be as lenient with whom they lend. So, if you’ve fallen behind on the old credit score lately, you might have trouble getting an unsecured loan approved.
The advantages of an unsecured car loan include the fact that you can use them for cheaper used cars and you can often borrow more than the value of the car to pay for things like registration, insurance and a nice pair of subwoofers. An unsecured car loan can also be useful if you’re buying a car as a gift for someone and don’t want them to lose their car if you cannot deal with refunds.