All About Fixed- vs. Variable-Rate Car Loans

Your customers trust you to help them find a vehicle that meets their transportation and financial needs. Thoroughly breaking down their financing options can help customers consider the full financial impact of purchasing a new car and give your business a reputation for honesty and transparency. 

At a minimum, you must ensure customers know the differences between fixed- and variable-rate car loans and can anticipate how their monthly payments may change over time. In the first quarter of 2023, the average car payment in the U.S. reached a record high of $725. If a customer were to agree to that payment only to find out a few months down the line that their interest rate would increase, they might think poorly of your dealership. 

What Is the Difference Between Fixed- and Variable-Rate Car Loans?

The main distinction between fixed- and variable-rate car loans is the opportunity for interest rates to change. When borrowers opt for a fixed-rate loan or line of credit, the interest rate stays the same throughout the loan term. A variable-rate loan can go up or down according to the terms the borrower agreed to. 

Variable-rate loans typically follow a prime rate, which is the rate that the lender uses as a basis to determine interest rates. The interest rate will change if the prime rate changes during a borrower’s loan term. 

Pros and Cons of Each Loan Type

Fixed- and variable-rate loans have advantages and disadvantages that you — and your customers — should understand. 

The pros of fixed-rate loans include:

• Predictability: The interest rate will never increase
• Availability: These loans are a lot more common than variable-interest loans

Meanwhile, fixed-rate loans have these disadvantages:

• Potentially higher rates: The fixed rate may be higher than the initial variable rate for a comparable loan. 
• No room to decrease: The rate will stay the same throughout the loan term even if the prime rates decrease. 

Your customers should also be aware of these pros of variable-rate loans:

• Lower rates up front: Variable loans typically have lower interest rates than fixed, at least for the first few months. 
• Opportunity for faster payoff: Borrowers may be able to take advantage of the initially low rates to pay off their loans faster. 

But variable-rate loans also pose these downsides:



• Unpredictability: The interest rates for these loans can rise unexpectedly, significantly increasing the monthly payment.
• Room for misunderstanding: Some borrowers may agree to a variable-rate loan without fully understanding the potential rate changes.

Helping Customers Choose the Best Car Loan

Your dealership should break down the pros and cons of fixed- vs. variable-rate car loans when helping customers choose financing. Ensure the customer fully understands the loan’s elements, including its life, interest rate, and monthly payment. For a variable-rate auto loan, ensure the customer knows the rate could increase and break down what their monthly payment would be if their rates rise. 

Edge Financial Services, LLC: Simplifying Financing for Dealers

At Edge Financial Services, LLC, we help car dealers across the country provide flexible financing for customers. We offer fixed- and variable-rate car loans and specialize in lending to customers with less-than-ideal credit histories. 

Learn more about our dealer financing today by calling (866) 890-2415.