What is a fixed-rate car loan?
A fixed-rate car loan is a loan that locks in (or 'fixes') your interest rate for the term of your loan. One of the big advantages of this is cash flow certainty. Knowing exactly what your repayments will be allows you to plan ahead and budget for the future.
Paying a fixed rate can also ensure you won't be hit with an unexpected rise in repayments should the Reserve Bank increase the cash rate.
Pros of a fixed rate car loan
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Certainty: By 'fixing' your rate, you know what your repayments will be every week/fortnight/month. For those on a strict budget, a fixed rate car loan can offer consistency and security.
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Possibility of a low interest rate: While it's no certainty, one advantage of a fixed rate car loan is you may be able to lock in a relatively low rate of interest while the market moves higher. Bear in mind, however, lenders are quite adept at forecasting interest rate cycles, so your fixed rate is likely to be set accordingly.
See also: How to calculate interest repayments on a car loan
Cons of a fixed rate car loan
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Paying a higher rate: The main disadvantage of a fixed-rate car loan is the possibility you could be paying a higher interest rate than you would have if you'd taken out a variable-rate car loan. If market interest rates fall during the term of your loan, you could be stuck paying a higher fixed rate.
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Limited flexibility: Many fixed-rate car loans are far less flexible, making it difficult for you to adjust the terms of the loan. This can include the ability to make extra repayments, change your repayment frequency (e.g. switching from monthly to weekly), or refinance.
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Fees: Fixed-rate car loans will generally come with more fees than variable-rate car loans. These can include break costs if you wish to pay off the loan early or refinance to another car loan product or lender.
What are the types of fixed-rate car loans?
There are two types of fixed-rate car loans: secured and unsecured.
A secured car loan is one where an asset (the car you're buying) is used as collateral against the loan. This means in the event you fail to make your repayments, the lender has the right to repossess the vehicle and sell it to recuperate its funds.
Secured loans are more common on the market. A secured car loan is essentially the same as a home loan, with the car you're buying used as security. With a home loan, the house is the security on the loan. If you don't meet the repayments, the lender has the right to take possession and sell it.
As you might've gathered, unsecured car loans don't require you to use your car as security. They actually don't require you to use anything as security, which understandably represents a much higher risk for the lender. If you were struggling financially or were to go off-grid, the lender would have to take you to court to get their money back. For this reason, unsecured loans are essentially the same thing as a personal loan.
To compensate for their risk, lenders offering unsecured car loans will usually charge a higher interest rate, more fees, and will likely be far more discerning as to who they'll lend to. So, if your credit rating isn't the best, you may well struggle to get approved for an unsecured loan.
What to watch out for with a fixed-rate car loan
While a fixed-rate car loan with a low advertised rate may seem enticing, it's important to check what fees and charges may come with it. You may also be up for:
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Application/establishment fees
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Extra repayment fees
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Redraw fees
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Extra payment/early payout fees
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Account keeping or service fees
Of course, interest rates and fees differ greatly between lenders so it's important to compare them when you're shopping around for a loan. A loan's comparison rate is one tool to help you compare the 'real' cost of a loan, taking into account certain fees although this may not always present a complete picture. As with any financial product, always be sure to read the fine print before you sign up.
