Advantages of a Fixed Interest Car Loan
Applying for a car loan with a fixed interest rate simply means paying a fixed amount of monthly installments until you cover the agreed price.
13:15 03 February 2021
It also means not worrying about the market fluctuations and knowing exactly how much of your loan is outstanding and how much you’re supposed to pay at a time. On the other hand, variable or floating interest rates are adjustable loan payments that don’t have fixed interests. Fixed interest rates for car loans allow borrowers to decide the period needed to pay back the loan; the lender distributes the payments and calculates the interest rates accordingly. Here’s everything you need to know about fixed interest car loans.
What Is a Fixed Interest Rate?
A fixed interest rate allows you to finance your car loan with fixed amounts every month. Your loan’s interest rate won’t drop or increase over the length of the loan due to any market fluctuations. It means you’ll know exactly how much your next payment is and how much you have left to cover the full price of the car. In contrast, variable loans have variable interest rates that lower or raise your monthly payments accordingly. People who take out floating loans have no way of predicting their installments or fixedly financing their monthly budgets. For this reason, fixed-interest loans provide the benefit of organizing your financial plans and controlling your monthly expenses.
If you’re looking for a car loan, you may not always be able to take out a fixed interest loan. For example, Federal students who borrowed loans after July 2006 are guaranteed fixed interest rates. On the other hand, private students may be offered variable rate or fixed interest rate loans. In which case, a variable rate loan may lead you to pay different installments throughout the loan period.
Fixed Rates During Increased Interests
The best time to apply for a fixed interest rate loan is when interest rates are predicted to rise. In doing so, the lender will be assured that the lent money will return a profit and also allow you to pay a fixed rate no matter how much the interest increases. After you consider the pros and cons of different financing options, if taking out a loan to buy your dream car is the best choice, start thinking about the type of loan to get. Many banks offer as low as 9 or 10 percent interest rates on their variable loans. However, this rate can go up or down depending on the economic situation. With fixed loans, you get an interest rate of about 10.5 percent; this is obviously higher than floating loans. However, at this rate, you will pay fixed payments disregarding the economic state.
As a variable loan borrower, banks or lenders may offer you to switch to a fixed interest loan. In such a case, you select your loan’s payments rate or duration, so make sure you are financially prepared beforehand.
Other Benefits of Getting a Fixed Interest Loan
Fixed loans give borrowers a sense of certainty toward their monthly payments. As a borrower, you will be assured that the changing market conditions leading to an increase or decrease in the index or prime rate will not affect the fixed payments you pay each month. Fixed loan borrowers can keep track of their cash flows and organize their finances according to fixed spending rates.
It’s a free-from-risk choice that works as a contract between the lender and the borrower and must provide all accurate information about the loan to both parties. Meaning fewer quarrels between lenders and people who suspect fraudulent practices due to increased monthly payment rates. Unlike floating loans, fixed-rate loans involve an agreement between both the lender and the borrower where both parties acknowledge the rates and agree with the payment amounts. When both sides agree to the payment plan, there are fewer chances of disputes against the rates no matter how far the index rates change.
Fixed-Rate Loans Are Easy to Find
While credit unions and banks are the best places for fixed car loans, you can always go online and compare different types of loans. Start by gathering as much information about yourself and the car you want to get as possible to compare rates and decide on the fixed rate for your loan. Your bank can’t give you a specific quote without checking your credit history, FICO score, and as much information as possible about the vehicle you want to purchase. Once you have this information, connect with credit unions and call trusted banks that offer promising quotes. You can then compare these quotes with the ones you’ve researched online. Many online tools offer help to compare lenders, their different types of fixed loans, and their interest rates.
The Downsides of Fixed Loans
We can’t mention the pros without going over the cons of fixed loans. While having fixed rates during unstable economic conditions is considered advantageous, they may not be as beneficial when the prime rates drop and your lenders lower their interest rates. Such a change will only impact floating loan borrowers while your loan’s interest rates will remain the same. Add to that the fact that fixed loans are higher compared to variable rates as lenders and banks estimate these rates based on predicted interest rate increases.
You can’t blame them for preparing a side plan in case the market rates fluctuate. It’s also important to note that lenders have the authority to increase or decrease the interest rates on your loan based on a few certain circumstances. If this is the case, your lender has to notify you of the changes in advance; this must all be explained in detail in the loan’s terms and conditions.
Buying a car is not a simple step for most working adults. The majority of car buyers cannot afford their cars’ prices in cash and have to borrow money to own their cars. In addition, there are complicated financial plans that must be set in place before deciding and sacrificing a large portion of your monthly income. For this reason, car loans are the number one financial method by which most people purchase their cars.