Fixed vs Variable Car Loans: Which Is Right for You?

When financing a car purchase in Australia, you'll typically have the choice between a fixed rate and a variable rate loan. Each option has distinct advantages and disadvantages that can significantly impact your finances over the loan term. Understanding these differences is crucial for making the right decision based on your personal circumstances, risk tolerance, and financial goals.

Understanding Fixed Rate Car Loans

A fixed rate car loan locks in your interest rate for the entire duration of the loan term. This means your repayment amount remains exactly the same from your first payment to your last, regardless of what happens to interest rates in the broader economy. For many Australian borrowers, this predictability is incredibly valuable for budgeting and financial planning.

When you take out a fixed rate loan at, say, 6.5% per annum for five years, that rate will not change. Even if the Reserve Bank of Australia raises the cash rate multiple times during your loan term, your repayments stay locked in. Use our car loan calculator to see exactly what your fixed repayments would look like over your chosen term.

Advantages of Fixed Rate Loans

Budget Certainty: The primary advantage of a fixed rate is knowing exactly what you'll pay each week, fortnight, or month. This makes budgeting straightforward and eliminates the stress of potential rate increases. You can plan your finances with confidence, knowing your car repayment won't suddenly jump.

Protection from Rate Rises: In periods of rising interest rates, a fixed rate loan shields you from increases. If you secured a loan at 6% and rates subsequently rose to 8%, you'd continue paying the lower rate, potentially saving thousands over the loan term.

Easier Financial Planning: For those who prefer simplicity and certainty in their finances, fixed rates remove one variable from the equation. You can accurately calculate your total loan cost from day one and plan accordingly.

Disadvantages of Fixed Rate Loans

Higher Initial Rates: Fixed rates are typically slightly higher than the starting variable rate because lenders factor in their own risk of rate movements. This premium for certainty means you might pay more if rates remain stable or decrease.

Limited Flexibility: Many fixed rate loans come with restrictions on extra repayments. Some lenders cap the amount of additional payments you can make annually, while others charge break fees if you want to pay off the loan early or refinance before the term ends.

Missing Out on Rate Drops: If interest rates fall during your loan term, you won't benefit from lower repayments. You'll continue paying the original fixed rate while variable rate borrowers enjoy reduced costs.

Understanding Variable Rate Car Loans

Variable rate car loans have an interest rate that can change over the life of the loan, typically in response to movements in the Reserve Bank of Australia's cash rate and broader market conditions. Your repayments will fluctuate as the rate changes, potentially increasing or decreasing over time.

Lenders generally review and adjust variable rates periodically, often monthly or quarterly. When rates go up, so do your repayments; when they go down, you pay less. This introduces an element of uncertainty but also opportunity.

Advantages of Variable Rate Loans

Lower Starting Rates: Variable rates typically start lower than fixed rates. This means lower initial repayments, which can be attractive for borrowers who want to minimize their immediate outgoings.

Benefit from Rate Cuts: When interest rates fall, you automatically benefit from lower repayments. In a declining rate environment, this can result in significant savings over the loan term.

Greater Flexibility: Variable rate loans usually offer more flexibility for extra repayments without penalties. This allows you to pay off your loan faster when you have additional funds available, reducing your total interest costs significantly.

No Break Fees: Most variable rate loans don't charge early exit fees, giving you the freedom to refinance or pay out the loan at any time without penalty. This flexibility is valuable if your circumstances change.

Disadvantages of Variable Rate Loans

Repayment Uncertainty: The main drawback is not knowing what your repayments will be in the future. Multiple rate increases can significantly boost your monthly costs, potentially straining your budget.

Harder to Budget: Without fixed repayments, financial planning becomes more challenging. You need to build in a buffer for potential rate increases when calculating affordability.

Stress During Rising Rate Cycles: When the RBA is increasing rates, variable rate borrowers can feel the pinch with each announcement. This financial stress is something fixed rate borrowers don't experience.

Which Option Is Right for You?

Choosing between fixed and variable depends on several factors:

Consider a fixed rate if: You value budget certainty and prefer knowing exactly what you'll pay each period. You believe interest rates are likely to rise during your loan term. You don't plan to make significant extra repayments or pay off the loan early. You have a tight budget with little room for payment increases.

Consider a variable rate if: You want flexibility to make extra repayments and pay off your loan faster. You believe rates will remain stable or decrease. You might refinance or sell the car before the loan term ends. You can handle some uncertainty in your budget and have financial buffers for potential rate rises.

The Middle Ground: Split Loans

Some lenders offer split car loans where you can have a portion of your loan at a fixed rate and the remainder at a variable rate. This approach provides partial protection against rate rises while maintaining some flexibility. While less common for car loans than mortgages, it's worth asking your lender if this option is available.

Conclusion

There's no universally "better" option between fixed and variable car loans—the right choice depends entirely on your personal circumstances, financial goals, and risk tolerance. Take time to consider your situation carefully, use our car loan repayment calculator to model different scenarios, and don't hesitate to consult with a financial advisor if you're unsure. Remember, what matters most is choosing a loan that fits your budget and gives you confidence in managing your car finance.