A variable-rate motor vehicle loan has an interest rate that rises and falls with the market.

All motor vehicle loans come with an interest rate, which represents the extra costs required on top of what the borrower is required to repay to the lender. In a variable motor vehicle loan, the interest rate is not fixed but left free to fluctuate during the term of the loan, based on the conditions of the market.

Can you make additional repayments on a variable loan?

In most cases, yes. For a variable interest rate loan, lenders usually allow borrowers to make extra repayments at no additional cost. If the borrowers become more financially capable (for example, with a pay raise) they can make larger or extra payments on the loan to pay it down sooner and, in turn, save on the cost of interest.

Borrowers can do this in several ways — by increasing the repayment frequency from monthly to fortnightly or even a weekly repayment, they can drastically shorten the term of the loan and reduce the resulting cost of interest. Another way is making lump-sum payments in addition to regular repayments to reduce the principal amount.

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