Fixed Rate Car Loan

What is a fixed rate car loan? What about variable loans? Read our explanation on fixed rates here.

Fixed Rate Car Loan

A fixed rate car loan is a type of car finance that sets one interest rate throughout the term of the loan. This “fixes” the interest rate at one point instead of being set by the market. Variable rates, as the term suggests, can go up or down depending on what the market is doing. Fixed rates give applicants peace of mind when budgeting, as the monthly or regular repayments are predictable. Fixed rate car loans have some downsides, such as restrictions on trying to pay the loan off early.

What kind of car loan is better? Fixed or variable rates?

This depends on your financial situation and requirements for a car loan. For most people, a fixed rate loan is best. A fixed rate locks in a rate for the entire period of the loan, which gives you equal repayments each month (or period of your choice.) This means you can budget more effectively when using a car loan calculator. To use a car loan calculator, you’ll need to know the amount you intend to borrow, the interest rate, and the loan term. This will give you an approximate repayment figure. This won’t change over the term of the loan.

A variable rate car loan is much harder to budget for. Variable rate loans go up and down depending on the market – the RBA Cash Rate, as well as other factors. This could be down to the exchange rate, as some banks and lenders rely on overseas funding for loans; consumer confidence; and “hidden” factors such as government red-tape or regulations.

You may be lucky and get approved for a loan when the cash rate is going down, which could save you money on repayments. Though, the opposite may occur: you could end up paying more in repayments over the life of the loan, especially if the cash rate goes up and doesn’t budge – the cash rate stayed the same for 31 consecutive months from August 2016 to May 2019, when it dropped from 1.5% to 1.25%.

However for some borrowers who want peace of mind of a fixed and equal repayment each month, the “luck of the draw” is unsuitable for this situation.

Fixed vs variable rates in practice

Here is a hypothetical scenario in which the market rates go up and down over a few months. Let’s say there is a fixed rate and variable rate loan with starting comparison rates of 6.5%. A borrower has taken out a $20,000 loan for five years.

Month Fixed Rate Repayment Variable Interest Rate Variable Rate Repayment

1

$391

6.5%

$391

2

$391

6.75%

$394

3

$391

7.25%

$398

4

$391

6.25%

$389

Total after four months

$1,564

6.69% (average)

$1,572

Though it doesn’t seem significant after four months, the fixed rate loan will mean the borrower has paid $3,479 in interest. If the interest rate maintains an average of 6.69% over the five years, and there’s no guarantee it will, the borrower will have paid at least $3,586 in interest.

The variable loan holder can make more loan repayments if they wish, either through additional payments or as a lump sum. This can reduce interest paid and the term of the loan. However, this is at the discretion of the borrower.

I want to pay off my fixed rate loan as early as possible. Can I?

Many fixed rate car loans do not encourage extra repayments such as lump sums or top-up amounts with regular repayments. Some lenders may charge fees – be sure to know what fees apply if you try to pay off a loan early. These are called early exit fees, early repayment fees, or discharge fees in most cases.

One way to pay off a fixed rate loan without penalty is changing your monthly repayment structure to fortnightly (every two weeks) or weekly.

This effectively increases your payments from 12 per year to 13 per year (26 fortnightly repayments = 13 monthly repayments.) This reduces your loan term by one month per year of your loan. If you have a usual five-year loan, you will pay off your loan in four years and seven months.

Most lenders and fixed rate finance products will give the borrower a choice of repayment frequency. If you want to pay off your loan early and save a bit in interest, opt for fortnightly or weekly payments instead.

Some loans and lenders will pay an early exit fee or discharge fee for fixed rate loans; however, this fee will be smaller as the loan term goes on – a matter of hundreds instead of thousands of dollars. It is much lesser after four years and seven months than if you opted to pay out the loan two years in, for example. Discharge fees decrease on a proportional or “pro-rata” basis.

Can I refinance a fixed rate loan?

Yes, however you’ll need to make the necessary calculations to see whether you save money in the refinancing process.

If you had bad credit or a current high rate and are now in a better financial position, you may want to save on interest by refinancing your car loan. This closes out your old loan by paying it off in full and continuing to pay off the debt with a new loan. Since most fixed rate car loans may trigger some type of exit fee or early repayment fee, this must factor into your overall calculation. As mentioned before, the earlier you terminate or exit a loan, the higher the discharge fee.

Refinancing a car loan towards the end of the term may turn out more expensive too; or it may be easier to pay off the loan in one lump-sum, instead of going through an application process again. There may be a middle point at which refinancing makes financial sense.

If your refinancing process costs more than the original loan, there is little financial sense in going through with the application.

Compare fixed rate car loans with Savvy

LenderProduct NameAdvertised RateComparison RateMonthly Repayment
Savvy New Car Loan 2.85%
fixed
3.93% $537.06
Bank of Australia Used Car Loan 6.45%
variable
6.66% $586.28
ANZ Online Secured Car Loan 7.85%
fixed
8.70% $606.14
CUA Fixed Rate Car Loan 7.99%
fixed
8.29% $608.15
BankSA Secured Fixed Personal Loan 8.49%
fixed
9.39% $615.35
St George Secured Fixed Personal Loan 8.49%
fixed
9.39% $615.35
CBA Secured Car Loan 8.49%
fixed
9.54% $615.35
NAB Variable Rate Personal Loan 14.19%
variable
15.06% $701.01

* Commercial loan with the loan amount of $40,000 is looking at a 5 year secured fixed rate of 2.85% p.a. and comparison rate of 3.93% p.a.. WARNING: all fees and charges may not be included on the example above, only the comparison rates, monthly repayment and total cost applies. Therefore, the total cost of the loan might be different. Comparison rate do not include broker fees, redraw fees, early termination fees and fee waivers. Comparison rate may change as a result of the different loan terms, fees and the loan amounts. Establishment fees and monthly fees do not apply to commercial loans, only consumer loans. However, there might be different fees apply.

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