The two different types of interest rates are fixed or variable. Not many car loan providers offer variable rate car loans, but they are still available.
A variable rate car loan is a secured car loan with a variable interest rate, which will use the car as security over the loan.
Here is an explanation of each type of interest rate.
Variable Interest Rates
A variable interest rate is usually more relevant to the cash rate that we hear about in the media each month determined by the Reserve Bank of Australia (“RBA”).
This will allow the financier to adjust the interest rates throughout your loan term, which would mean that your repayments can change. There is no certainty to what your repayments will be, and there is no guarantee that your loan provider will reduce your interest rates just because the RBA did.
Variable interest rate car loans can have some good features though, as they will often not penalise you if you paid your loan out earlier than the contracted agreement, as the lender would not have any economic loss. They may also come with a redraw facility that allows you to take back out any additional repayments above your minimum you had made.
Fixed Interest Rates
Fixed interest rates are not as related to the RBA cash rate as variable interest rates, as it depends on how they obtain those funds at a guaranteed rate over a guaranteed time frame.
They may get different rates on their money depending on the length of time they want to sell those funds for, which is why you would often see with home loans, different fixed rates based on how long you decide to fix your interest rate for.
A fixed interest rate car loan gives you certainty that your interest rate and repayments will stay the same as per your contract throughout the full loan term.
Fixed rate car loans are usually just as flexible as variable rate car loans in regards to the allowance of additional repayments, or early payout of your car loan. However, as you have a fixed rate loan agreement, the lender may have an economic cost when you terminate your fixed rate car loan early, so break costs and early termination fees may occur.