EchoBay Expert: My credit union is offering a two choices of interest rates for auto refinance loans. One is a fixed rate and the other a variable. I want to refinance $9,000 for three more years. Which should I choose?
Loyal Reader: It depends! With fixed rate auto refinance loans, your risk is eliminated. Your rate is fixed along with your payment schedule and amount. There will be no surprises down the road. However, with a variable rate loan, your interest rate can vary greatly over the term of the loan, which means your payment can as well.
There are several questions to ask about variable rate auto refinance loans.
1. What is the interest rate cap?
With variable rate loans, there is generally a cap in place, which means the interest rate will never increase over that percentage. Calculate your payment at the highest possible interest rate - can you still afford it?
2. What is the minimum interest rate?
The minimum is also sometimes referred to as the floor rate. This is the lowest your rate can ever be. Calculate your payment with this rate and compare it to the payment of the fixed rate loan. Is there a big difference?
3. Future of rates.
Possibly the biggest deciding factor is a guess as to what you believe interest rates may do over the next three years. If your forecast that rates will rise, you may be better off with a fixed rate loan. But if you believe rates will stay relatively constant or will decrease, a variable rate loan can save you quite a bit of cash over three years compared to a fixed rate loan.