What’s the difference between a fixed and variable rate?

If you want to finance your car by taking out a loan, you have two options to choose from when it comes to how you pay your interest rates.

Fixed Rate

  • Consistency. With a fixed-finance rate on your car loan, the interest rate will not change for any reason over the entire duration of the loan. You will be able to see and know what your payment will be each month, with no fluctuation.
  • Long-term advantage. Fixed-rates are better for longer-term car loans, especially if the interest rates at the time you sign the loan is lower than normal.
  • Short-term disadvantage. It is less effective for a short-term loan or for long-term loans where the interest rate at the time is very high.

Variable Rate

  • Flexibility. Variable rates can change based on either the “prime rate” or a different rate referred to as the “index”. Whether the interest rate changes or not depends on if there was any fluctuation in the market of interest rates.
  • Risk-reward. Variable-rate loans can be riskier than fixed-term loans, especially over a longer-term loan should the market cause a prolonged increase of rates.
  • Short-term advantage. Experts say that variable-rates usually result in less interest being paid than a fixed-term rate, but the longer the loan is the greater the impact to your payments if there is any increase in the market.

So when it comes to choosing the right interest rate for you, keep in mind what your plan is for the car you’re buying. Do you want to have it for several years and until it falls apart? If so, then you want the security and consistency of a fixed rate. Or, do you plan on reselling it and getting a new car after a shorter term of a few years? In that case, you’re more likely to pay less interest with a variable rate – but there is the risk that you wind up paying more.