Variable rate car loans allow borrowers to benefit from favourable financial environments by placing the power to adjust interest rates in the lender’s hands. Many financiers use federal interest rates as guidelines for the interest rates of their loans, and when federal interest rates fall, borrowers often reap the reward in the form of a lower repayment bill for the month. However, variable interest rates are more complex than their fixed rate counterparts, and understanding how they work is essential to deciding whether a variable rate loan is the best choice for you.
Unlike fixed rate car loans, which allow the lender to set a defined interest rate at the start of the loan term, regardless of market performance, variable rate car loans can fluctuate with the market. When you’re searching for car finance loan, consider that variable rate borrowers can enjoy monthly payments significantly lower than fixed rate borrowers as well as pay hundreds less over time if the market conditions hold for the life of the loan in low interest rate environments.
Variable rate car loans are a good option for car buyers taking advantage of a sluggish marketplace, as the low interest rates can make for smaller payments for an extended portion of the repayment period, minimizing the overall cost of financing. They’re an especially appealing option for shorter-term car loans, which makes it much more likely that federal and lender interest rates will stay stable for the duration.
Of course, the other side of the variable rate equation means that a variable rate loan is at risk to increase in cost over time. A variable rate loan is tied directly to national market performance, and so a sudden surge in interest rates can mean that a given monthly repayment bill is much higher than the previous months’.
This fluctuation makes a variable rate loan much less stable than a fixed rate loan, and where fixed rate borrowers can simply look to the amount of their monthly payment and the life of their loan to see a clear repayment figure, variable rate loan repayment is much less concrete. Although variable rate borrowers may pay less during the term of the loan than fixed rate borrowers, there is no guarantee that interest rates will remain at optimal levels during the course of a 5 or 7 year repayment period, and so they can be somewhat risky options for loans with longer repayment terms.
Variable rate car loans allow borrowers to take advantage of the most favourable financial atmospheres for borrowing, but this flexibility comes with an element of risk. While a variable rate car loan may be less costly over the life of the loan than many fixed-rate loans, their dependence on market performance can make them a better choice for short-term borrowers rather than those who are financing their new vehicles over an extended period of time.