Which is the better choice for a car loan, a fixed interest rate or variable interest rate?
I know fixed-rate and variable-rate loans are available for things like mortgages, but when it comes to car loans, which is the better option?
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Answered on Mar 08, 2021
Generally speaking, fixed-rate auto loans are better for borrowers than variable-rate auto loans.
Variable-rate loans, as the name implies, can change periodically. The changes are tied to a benchmark, usually the U.S. prime rate. If it goes up, your loan’s interest rate (and monthly payment amount) goes up, too.
This type of loan may make sense if the interest rate is very low and the loan term is shorter than two years, or if you plan to aggressively pay off your loan before it becomes due. But with fluctuating interest rates, there’s also the risk that borrowers can end up upside-down on their car, meaning they owe more on the loan than their vehicle is worth.
With fixed-rate loans, the interest rate remains constant. This provides security since you’ll always know what your monthly payment amount will be. These types of loans are ideal for longer-term financing, especially if interest rates are volatile or expected to rise.
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