Fixed-Rate vs. Variable-Rate Car Loans: Which Is Better?

Fixed-Rate vs. Variable-Rate Car Loans

Whether you prefer a fixed- or variable-rate car loan may come down to your comfort level with interest rate fluctuations and how well you can manage changes in your monthly payment. Here's a side-by-side breakdown of their key differences.

How Do Fixed-Rate Car Loans Work?

A fixed-rate car loan has a set interest rate for the entire life of the loan, typically 36 to 84 months, though some may be shorter or longer. Lenders calculate the interest rates they offer using risk-based pricing. In other words, a lender may charge you a higher interest rate if they believe you're more likely to default on your loan due to your credit score, income, debt levels and other factors.

The interest rate you qualify for will be represented as an annual percentage rate (APR), which also includes the loan's fees. A higher interest rate will result in higher monthly payments and will ultimately cost more over the life of the loan than a lower-rate loan.

Pros and Cons of Fixed-Rate Auto Loans

A fixed-rate car loan offers predictable monthly payments and other key benefits, but there are also trade-offs you'll want to consider.

How Do Variable-Rate Car Loans Work?

A variable-rate car loan comes with an interest rate that may periodically change. The interest charged on the loan is tied to an underlying benchmark, usually the lender's prime rate, which can change with market conditions. If a prime rate increase causes your loan's interest rate to go up, expect a higher monthly payment amount as a result.

To determine the initial interest rate for your loan, your lender will consider the prime rate, market conditions, your credit score, income and debt levels, and other factors. A variable-rate auto loan may be a good option when you expect the rates to decline during the loan's repayment term.

Pros and Cons of Variable-Rate Auto Loans

Variable-rate car loans come with benefits and downsides you should review to decide if they're the right fit for you.

How Much a Fixed-Rate vs. Variable-Rate Car Loan Costs

The type of interest rate you choose will directly affect your monthly payments and the total amount you'll actually pay over time. Understanding how much you'll end up paying in either scenario can help you figure out which loan works better for your situation. Let's walk through an example to show the cost difference more clearly.

Example: Let's say you take out a 60-month auto loan for $41,572 at a fixed interest rate of 6.35%. That's the average amount car buyers financed and the average rate they received during the fourth quarter of 2024, according to Experian's State of the Automotive Market Finance report. In this case, your monthly payment would be roughly $810, and you'd pay $7,057 in total interest. In all, you'd pay $48,629, not counting title registration and other fees.

Now imagine financing the same car with a variable-rate loan instead. Your loan starts with a lower introductory rate of 5.35%, leaving you with monthly payments of around $791. Over time, though, the loan's rate climbs and ultimately averages out to 7.35%. That brings your total loan cost to $49,803.45, which is about $1,174 more than the fixed-rate loan.

While the numbers may be different in the real world, this scenario is a common one. A variable-rate loan can help you save a little money upfront, which may work out well if you plan on paying off your car quickly. But if rates go up, you'll likely pay more over the full term.

How to Choose the Best Car Loan for You

The type of interest rate you choose may depend on how much financial risk you're comfortable taking and where interest rates stand when you apply. Here are a few considerations to help guide your decision.

Risk Tolerance

A fixed-rate car loan may be your best option if you value stability and want a consistent monthly payment that never changes. You can set your autopay and forget it—no need to worry about unexpected increases down the road.

On the other hand, you might prefer a variable rate loan if you're comfortable with some rate uncertainty. If your budget allows, you might apply extra funds to your monthly payments to pay off your car loan early and pay less interest (though check whether your loan has a prepayment penalty and how much it would cost you). Still, you'll need to be prepared for rate changes that could increase your monthly payment.

State of Interest Rates

If you expect interest rates to climb, it's often wise to lock in a fixed rate before rates go up. But if interest rates are declining, you might save money with a variable-rate loan since your interest rate will also decrease. For example, average rates on 48-month new car loans stayed below 5% from 2012 through 2022 but rose above 7% in 2023, according to the Federal Reserve Bank of St. Louis. Borrowers who locked in a fixed rate before 2023 likely saved hundreds in interest compared to those who waited.

Loan Term

Your loan term plays a big role in your interest costs, monthly budget and the total amount you'll repay. Whether you have a fixed- or variable-rate car loan, a longer term will usually lower your monthly payment but cost more in interest over time.

As you compare car loans, you can ensure you get the best deal by paying close attention to rates, repayment terms and the total cost of the loans.

• APR: The APR is the cost of borrowing money, including both the interest rate and fees. Generally, the lower a loan's APR, the less you'll pay overall.
• Repayment term: Car loans are usually offered in terms ranging from 36 to 84 months, though longer and shorter terms exist. According to 2023 data from Edmunds, 69% of car loans for new vehicles have terms of more than 60 months. While a longer-term loan can land you a cheaper monthly payment, you'll pay considerably more in total interest compared to a shorter-term loan.
• Total cost of the loan: It's a good idea to run the numbers using a car loan calculator to make sure you're saving the most money. A loan that has a lower rate may actually end up costing more than a loan that has a higher rate but a shorter loan term. It's key to consider all factors of a loan's cost.

How to Get a Car Loan

Getting a car loan is a relatively straightforward process, but there are some key steps you'll need to take.

Review Your Credit Score

Before shopping for a car loan, it's a good idea to check your credit score since it weighs heavily on your loan approval odds and the interest rate you'll receive. Generally, you'll want a FICO^® Score^☉—used by 90% of top lenders—of at least 661 to qualify for favorable rates and terms. If your score falls below that, it may be worth putting your car-buying plans on hold while you work to improve your credit. You can check your FICO^® Score for free from Experian.

Set Your Budget

As with any loan, you'll want to make sure new loan payments fit within your monthly budget before taking on new debt. Experian's car payment calculator can help you estimate your total cost and monthly payment amount based on your loan size, interest rate and repayment term. Don't forget to factor in any down payment or trade-in you plan to use.

While reviewing your budget, it's a good idea to add up your monthly debt obligations, including mortgage payments, personal loans and minimum credit card payments. Compare this amount to your gross monthly income to determine your debt-to-income ratio (DTI). Along with your credit score and other factors, lenders typically look for a DTI of under 50% when determining your loan eligibility and setting your rate.

Shop and Compare Loan Offers

Once you've set your budget and checked your credit, take time to shop around with several lenders. Credit unions often offer better rates and terms than traditional banks, but you typically need to be a member to qualify. If you're buying through a dealership, consider dealer financing only if they can match or beat the offers you've already received from banks, credit unions or online lenders.

When comparing loan offers, don't just focus on the monthly payment. Pay close attention to the APR, fees and total interest paid to make sure you're getting the best deal.

Get Prequalified or Preapproved

Before you step onto a car lot, it's worth getting prequalified or preapproved for a loan. This helps you understand what kind of rate and loan terms you're likely to qualify for without any commitment. You can even use your preapproval as leverage to see if the dealership can match or beat it.

To get prequalified, you typically just need to complete a short online form with your income and employment details. Prequalification shouldn't have any effect on your credit. Preapproval is a little more involved. You'll need to submit a full application, pay stubs other documents and agree to a credit check that results in a hard inquiry.

Finalize the Loan and Drive Away

Once you've settled on a car and a loan with the most favorable terms, it's time to finalize the loan. Review the loan contract carefully before signing to make sure everything matches what you were offered. Take your time and ask questions if anything looks off. Once you're satisfied the paperwork is in order, sign the contract and drive off with your new ride.

Learn more: How Much Car Can I Afford?

The Bottom Line

Whether you opt for a fixed-rate or variable-rate car loan, make sure the payments are affordable and there's room in your budget for unexpected expenses and your other monthly obligations. Taking the time to compare loan terms, rates and total costs before financing your car can help you avoid financial trouble down the road.

As mentioned, your credit is a primary factor lenders consider during the approval process. Consider signing up for free credit monitoring with Experian to get alerts to changes in your credit usage. You'll also be able to track your FICO^® Score over time so you know where you stand before applying for an auto loan.