Fixed vs Variable Car Loan Rates

When taking out a car loan, one of the key decisions is whether to go with a fixed or variable interest rate. Each has its advantages, and the right choice depends on your situation and how you think rates will move.

What's the Difference?

Fixed Rate

Your interest rate stays the same for the entire loan term. If you lock in 7.5%, you pay 7.5% from start to finish — regardless of what happens in the market.

Variable Rate

Your interest rate can change over time, usually in line with the Reserve Bank's cash rate or the lender's cost of funds. If rates go up, your rate goes up. If rates go down, your rate goes down.

Fixed Rate: Pros and Cons

Pros

• Certainty — you know exactly what your repayments will be
• Budgeting is easy — no surprises, same amount every time
• Protection from rate rises — if rates go up, you're locked in at the lower rate
• Peace of mind — no need to worry about rate movements

Cons

• Miss out if rates drop — you're stuck at the higher rate
• Often slightly higher — fixed rates typically have a small premium built in
• Break costs — paying out early can incur significant fees
• Less flexibility — changes to the loan structure can be costly

Variable Rate: Pros and Cons

Pros

• Benefit from rate cuts — if rates drop, your repayments decrease
• Often lower starting rate — variable rates can be lower than fixed
• More flexibility — easier to make extra repayments or pay out early
• No break costs — typically lower or no early exit fees

Cons

• Uncertainty — repayments can increase if rates rise
• Harder to budget — you don't know exactly what you'll pay long-term
• Risk of rate rises — multiple increases can add up significantly

Comparing the Options

What Happens When Rates Change?

Let's say you have a $30,000 loan over 5 years:

Not catastrophic, but it adds up — especially if multiple rate rises occur.

Which Should You Choose?

Choose Fixed If:

• You value certainty and predictability
• You're on a tight budget with no room for payment increases
• You believe rates will rise during your loan term
• You won't need to exit early or make major extra payments
• Current fixed rates are historically low

Choose Variable If:

• You want flexibility to pay off faster or exit early
• You believe rates will stay stable or drop
• You can absorb payment increases if rates rise
• You might refinance or sell the car before the loan ends
• The variable rate is significantly lower than fixed

What About the Current Market?

Interest rate predictions are notoriously difficult, but consider:

• Where are rates now? Are they historically high, low, or average?
• What's the RBA doing? Are they raising, cutting, or holding?
• Economic outlook? Inflation, employment, and economic growth all influence rate decisions

If rates are high and expected to fall, variable might be attractive. If rates are low and expected to rise, locking in a fixed rate could save you money.

Can You Get Both?

For home loans, you can often split between fixed and variable. This is less common for car loans due to the smaller amounts and shorter terms — most car loans are either fully fixed or fully variable.

What Most People Choose

In practice, most car loans in Australia are fixed rate. The certainty of knowing exactly what you'll pay each month appeals to most borrowers, and the differences in rate are usually small enough that the peace of mind is worth it.

The Bottom Line

Neither option is universally "better" — it depends on your priorities and expectations. If in doubt, fixed rate is the safer, more predictable choice for most borrowers.

Want to compare your options? register your interest and we can show you both fixed and variable rates for your situation.

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