The Risks of Fixed Interest Car Loans

Fixed interest car loans may be the more predictable option, but they are not always the better option. Many people feel fixed interest loans are always better because they cannot skyrocket or rise to out-of-control rates. However, they also are not flexible to the needs and circumstances of the individual. Fixed interest loans have many risks that can outweigh the stability of the choice.

Regressive Payment Structure

With a fixed interest loan, you will be making the same monthly payment at the beginning of the loan as you will make at the end of the loan. Most car loans extend beyond 3 years, averaging at around 5 year repayment structures. Consider the income you are making now compared to the income you will be making 5 years from now. It is likely that you will be able to afford a higher monthly payment at the end of the loan. With a fixed interest car loan, you will be paying a much larger portion of your income in the first few years.

This is especially magnified among individuals who are recently out of college or seeking their first loan. With an entry-level salary, you will likely limit the options of cars you can afford by seeking only a fixed interest car loan. Adjustable rates can allow you to purchase a nicer car that will last you much longer at a low monthly payment structure in the beginning. As your salary increases, your payments will increase, but you may end up paying the same proportionally throughout the life of the loan.

Fixed Terms

With fixed interest rates come strict, fixed terms on most loans. This means you will not often have options to renegotiate a loan in the future. When you seek a fixed rate, especially on a high risk car loan, you are agreeing to that interest for the life of the loan. You are also saying you will not pay the loan off early or refinance. If your credit improves, you may find a better deal in the future.

You will have to pay high fees and penalties in order to alter the terms of most fixed-rate loans. In truth, you will likely face these penalties any time you modify a loan, regardless of the rate structure. However, with adjustable-rate loans, you will often be subject to periodical re-negotiations in rates and other terms. These may include adjustments to higher rates, but with adjustment you may have the option of changing your loan terms. 

Lack of Options 

Fixed-rate loans offer security, and you will sacrifice options to have this security. Adjustable rate loans often present the most options to a borrower. Options may include caps on how high the rates can adjust. For example, you may set a limit that the rates may only adjust a certain percentage over the initial interest rate. You may also decide rates can only adjust a certain amount over the national interest rate. Because you may seek these options, you may find more control and personal input with an adjustable rate. Use these options wisely to protect yourself from skyrocketing rates. 

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