Fixed vs. Variable Interest Rate Car Loans: Which is Better?

Fixed vs. Variable Interest Rate Car Loans: Which is Better?

Posted on June 11, 2023

When shopping around for car loans, you will see two terms used a lot, fixed rate and variable rate. All car loans will feature one or the other and some lenders deal exclusively in one form of interest over the other. So what are they and which is best?

Fixed Rate Car Loans

Fixed-rate car loans are where the interest rate you pay is fixed for the term of the loan. So the rate you pay at month 1 will be the same as the rate you pay on the final month.

The benefit of a fixed-rate car loan is predictability. Your rate and monthly amount will always stay the same regardless of what’s going on in the world.

A fixed rate is easier to budget as you always know what is due each month and don’t have to worry about the financial state of the country or the wider world.

Variable Rate Car Loans

Variable-rate car loans use a calculation that uses the prime rate plus a percentage. That means the prime rate average in Canada plus a little extra for the lender to make a profit. As the prime rate rises or falls, the interest rate on your car loan can also rise or fall.

Often, a lender will offer a fixed rate for the first year or two and then switch to a variable rate. That means you get the benefit of the fixed rate as above but then switch to a variable rate.

The advantage of a variable-rate car loan is that it moves with the national average prime rate. When that falls, your loan interest falls. However, if that rate increases, so does your loan interest rate.

Just make sure you know your lender’s rate cap before signing. A rate cap is an upper limit for interest rates on the loans they offer. It’s an important factor when shopping for variable-rate loans.

Not having a rate cap means there will be no upper limit to the interest rate if the prime rate went crazy.

Fixed vs. Variable Car Loans: Which is Best?

As always when answering these questions, the answer depends entirely on your situation.

A fixed rate works best if you prefer knowing exactly what’s going out each month. It can also be beneficial if you think the prime rate will increase over your loan term. Those with higher credit scores can secure great deals on fixed-rate loans.

Variable-rate car loans can be beneficial for those who would like a shorter repayment term. If you think the national prime rate is going to fall, a variable rate is the only loan that could take advantage of that. Just be aware that if the prime rate rises, so will your interest!

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