Comparing Fixed Interest and Revolving Credit Car Loans

Fixed interest car loans are made in one, lump sum payment called the principal. This principal is paid off with set monthly payments at a given interest rate. While fixed interest car loans are the most common form of auto loans, there are other options. One option is a revolving credit car loan. This is similar to securing a credit card for the sole purpose of purchasing a car. Revolving credit card loans are a more flexible option because you can determine how much to pay off each month beyond a minimum payment requirement. The loans also vary on a number of other factors such as interest rates, terms and the affect on your credit score.

Interest Rates

Interest rates on a fixed interest car loan are stable over time. You will know at the beginning of your loan exactly what you can expect to pay at the end of your loan. The rates are set based on your personal financial profile as assessed through your application and credit report. Revolving loans typically have adjustable rates. This means you may see a large variance over the life of the loan. Typically, the interest rates will be offered at a low introductory number to start. They will usually adjust up. However, you can control how high the rates adjust with the right contract. If you are seeking a revolving loan, make sure you stipulate a maximum APR in your contract. This can usually be set by agreeing the APR will not go above a certain percentage higher than either your introductory rate or the national interest rate.

Loan Terms

Loan terms include more than just interest rates. Your loan will also stipulate the length of the loan, monthly payments, and terms for exiting the loan early including any penalties and fees for modification. The length of your loan will have an affect both on your interest rate and your monthly payment. Usually, the longer the loan, the higher the rate but the lower the monthly payment. You will get a better deal with a shorter loan paid off faster. However, many people elect the low monthly payments instead. Penalties and fees for modifying the loan should be considered before signing a contract. You may want to refinance or pay it off early, and you should seek to have that option with relatively low fees. Revolving loans typically have more flexible terms than installment loans. 

Credit Score Impact

Your credit score reflects how well your debt is diversified. This means you want to have a mix of installment loans and revolving credit loans. Auto loans and mortgages are typically the main sources of installment loans for most people, though personal loans and student loans also qualify. If you operate mostly on a revolving credit card for your other sources of debt, seek an installment loan for your auto loan. This will help boost your credit score and diversify your financial health for the future. If you are considering a mortgage soon, this is a great step to show your ability to pay off an installment.

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