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 entirety of the loan term. One of the main advantages of this is cash-flow certainty. By knowing exactly what your repayments will be, you’ll be able to plan ahead and budget for the future.
Fixed rate means you won’t be hit with an unexpected rise in repayments should the Reserve Bank increase the cash rate. This often helps with budgeting, as your repayments will remain the same.
Below are some of the most competitive fixed rate car loans available to help get you behind the wheel sooner.
Pros of a fixed rate car loan
The main advantage of a fixed rate car loan is the security. By “fixing” your rate, you know what your repayments will be every week/fortnight/month.
For those who have a strict budget, a fixed rate car loan allows you to have consistent repayments.
Another advantage of a fixed rate car loan is you may be able to “fix” your interest rate in at a low rate.
If market interest rates rise during the loan, you will be unaffected and still be paying the same rate. Bear in mind, however, that banks and lenders are quite adept at forecasting interest rate rises and falls, so your fixed rate is likely to be set accordingly.
Cons 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 car loan. If market interest rates fall during the loan, you will be stuck paying the higher rate.
Additionally, many lenders are less flexible with fixed rate loans, making it harder for you to make extra repayments, adjust your repayment frequency (e.g. monthly to weekly) or refinance.
You’re also more likely to be charged break costs on fixed rate loans if you wish to refinance or pay off the loan early.
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 that in the event that you fail to meet your repayments, the lender has the right to send in the repo men to take the asset off you to recuperate its funds.
Secured loans are the more common type of loan. 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 bought is the security on 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’ve gathered from the ‘un’ in the name, unsecured car loans do not require you to use your car as security. They don’t require you to use anything as a security, which understandably represents a much higher risk for them. If you were to be struggling financially or go off the grid, the lender will have to take you to court in order to get their money back. For this reason, they're essentially the same thing as a personal loan.
To compensate for this risk, lenders offering unsecured car loans will usually charge a higher interest rate, more fees and probably won’t be as lenient with who they lend to. So if you’ve fallen behind on the old credit rating lately, you might struggle to get approved for an unsecured loan.
An unsecured car loan might be useful if you’re purchasing a car as a gift for somebody and you don’t want them to lose their car if you can’t meet the repayments.
