Cars come in all shapes and sizes, so why shouldn't car loans be the same? Variable rate car loans (or adjustable rate car loans) also come in different forms, but we’re not talking about curves and lines here. We’re talking about numbers. Unlike fixed rate options that give you a set monthly rate for a given amount of time, variable rate loans have fluctuating rates that change from time to time. This means that your payment for each month varies, depending on how interest rates change in the market.

How do variable rate car loans work?

Variable rate car loans vary over time, with the initial interest rate (typically between 12 and 24 months) lower than fixed rate loans. There is one point where they are fixed for a certain period of time and will remain constant. After this period, the interest rate will change to a pre-planned regularity. It can fluctuate significantly- from one month to ten years (or more). Generally, the shorter the adjustment period, the lower the initial rates required.

This changeability (and unpredictability) makes adjustable rate loans more complicated than fixed rate loans. It’s also riskier. If you’re the type of person whose idea of “unpredictability” involves watching National Geographic daily with your hamsters, then this option is not for you. Frankly, you need to have some guts (and a lot of money) to make variable rates work well for you.

What are the advantages of variable rate loans?

So what are variable rate loans, and what good can it do for you? Variable rate car loans are good for those who want to keep their loans for a short time. Remember that the longer you hold it, the more chances of losing a lot of money. This is especially true if interest rates are going up. Some of its advantages include the following:

They help you save a lot of money when you first purchase a new car. This is because they begin with a low introductory interest rate that's enticing to the car buyer.

  • They are great for borrowers with good credit backgrounds because they can qualify for much bigger loans.
  • Borrower can enjoy lower interest rates if the market rates are going down.
  • The adjustable interest rate loan is a great choice if the long-term trend indicates a down-turn of market interest rates. It’s also good if the interest rates are high yet expected to fall soon.
  • Unlike fixed rate loans, it has more flexibility when it comes to making extra repayments during the term without paying extra fees in the process.

What are the disadvantages of variable rate car loans?

Now here’s the downside to this: since monthly payments are not fixed, they can change frequently during your entire loan term. Taking big loans is also risky, since your chances of encountering rising interest rates can double in just a few years. In fact, there are some variable rates that are structured so that the rates almost double in a couple of years (beware of that). This will be a big problem for you if you’re income isn’t stable during that time. When this happens, expect to lose a large chunk of money every month.

Tips on how to choose your adjustable car rate loan

Before you decide go ahead and choose this type of loan, make sure to consider the following:

Income

  • How stable is your job?
  • Can you easily find work if you suddenly lose your current job?
  • Are you the sole breadwinner of the family, or do you have someone to help you pay for all your expenses?
  • Will you have enough money left to for car repairs and maintenance?
  • Do you have a large family?
  • How much debt do you have?
  • Do you plan to have kids (or add another one in the near future)?
  • Will your kids go to college someday?
  • Do you have enough money to compensate for sudden interest rate surges and increases?
  • And will you and your family continue to live comfortably well even when situations like these happen?

Lifestyle

  • Are you willing to make the necessary lifestyle changes just to pay for the car you want?
  • Or will you be able to continue the kind of life you have despite your added expenses?

Personality

  • How much of a risk-taker are you?
  • Does the prospect of paying monthly bills for the next one, two, three, (or more) years worry you?

Make sure to read the terms and conditions first

One you've decided to go with variable rate car loans, read the agreement terms and conditions carefully. A lot of these loans impose upper limits for interest rates (interest cap). Interest caps will make you extremely vulnerable to fast-rising interest rates, so avoid them as much as you can. Keep abreast of loan rate changes and increased interest rates regularly. Knowing these two alone will save you a lot of money over your loan's entire term.

Give a bigger down payment (and check your credit history)

Offer a larger down payment if you can afford it. This gives you more credibility to loaners. Also, make sure that your credit history is clean. If you have outstanding balances that show up in your record, then chances of getting a loan approval is next to nothing. Remember that your chances of getting the loan you need will depend on your credit history--if it shows that you diligently pay your required monthly balance (on time), then it will be much easier for you to get a bigger loan. The cost of a car is one of the biggest personal expenses that you—and many others—will face in modern times. It's not something you can just walk away from without getting burnt in the process, so before taking an enormous debt to purchase the vehicle of your dreams, sit down and do the math first. Think objectively about your personal situation, your personality, and your current lifestyle. Having a realistic view of yourself will help you make an informed decision. This gives you the confidence to buy a car that you can afford without compromising your future.