Factors to Consider When Looking For an Auto Loan
For most people, financing a car might not be possible without a loan. Depending on your financial position and the car you intend to buy, car financing may prove to be impossible. However, with proper planning you can get the car of your dreams without wrecking your finances.
The loan interest rate and your budget
Loan repayments take several years and unless you have carefully planned how to repay, you might find that your budget is a complete mess after a short while. The interest rate is a critical determinant of what your budget will look like as you proceed to make repayments, and it is therefore important that you choose your interest rate with great care, and explore the various possibilities available.
Interest rate options available
When paying the interest on your auto loan, you could choose either a fixed or variable rate. Each rate has its benefits and drawbacks and the option that works for one person might be detrimental to another.
Fixed interest rate
As the name suggests, when you choose a fixed rate, you’ll pay interest at a predetermined fixed rate for the entire loan term regardless of changes in the market rates. Therefore, with a fixed rate, you’ll know with certainty the amounts that are due to the lender and the exact day when you’ll clear your payments.
Variable interest rate
If you choose a variable interest rate, your payments will vary every time the lender’s rates change. While this can be destabilizing for some people, those who choose to pay using a variable rate are usually hoping to take advantage of times when the interest rates fall. Whenever this happens, some of the money that could have gone to repay the interest on your loan will be credited to your loan account resulting in a shorter time to clear your loan.
On the other hand, if interest rates rise, your regular payment will be inadequate to cover both the interest payment and the repayment on the principal. In such a situation, less money will be available to repay the principal and if this persists, you’ll take longer to repay the loan than you had envisioned.
In a volatile time when fluctuations in interest rates are likely, a variable rate can be quite destabilizing. This is especially true for people with a fixed income that is not likely to change during the loan period.