Fixed Rate Loans

Although lenders have recently started to offer car buyers what are known as variable rate loans, experts agree that fixed rate loans are a better bet for most borrowers.

A variable rate loan is a loan where the interest rate can change based on what's called the prime rate. Banks and other lenders follow the U.S. prime interest rate, which is a consistent across-the-board guideline for what the best borrowers would receive from a lender in an "ideal" case.

If a lender (such as a dealer) offers a car buyer a variable rate loan, that means that the interest rate on the loan change as the U.S. prime rate changes - meaning that it could go up. Without solid information on price caps or loan rate caps for a loan, the buyer doesn't know how much the loan rate could go up. Also, without a good calculator, a buyer may not be sure how that ould affect the entire amount that he or she would pay over the course of the payment term.

Dealers may also offer variable rate loans for a long term. The longer the term, the worse this deal can be for a borrower. Raising interest rates, with interest that is compounded and changed every month, could have a borrower "upside down" on a vehicle, or paying it off well beyond the lifetime of the vehicle.

That best option for most car buyers is a fixed rate, short term loan with payments that the driver can afford. Anything else can be a recipe for a continual drain on the buyer's wallet. That's why it makes sense to be skeptical about the new auto loan products that a dealer or other lender might offer.