Fixed vs Linked interest rates when buying a car – What you need to know

If you’re in the process of financing a new ride or are planning to do so, you will inevitably be faced with the decision of choosing a fixed or linked interest rate.

The interest percentage is the rate at which a bank or finance house charges you for borrowing money, while fixed or linked determines whether the monthly repayment stays the same for the duration of the contract or fluctuates along with the prime lending rate, said financial service provider WesBank.

Those who opt for a fixed rate will enjoy paying one constant sum to the bank every 30-odd days for however long they choose their finance agreement to be – which is generally between five and seven years, translating to between 50 and 84 instalments.

A linked interest rate, on the other hand, rises and dips with the country’s prime lending rate which, in South Africa, is determined by the reserve bank.

If the benchmark rate increases, so, too, does the monthly remittance required by the lender. Conversely, if the prime drops, the repayments follow.

Linked interest rates can also be an attractive option as they initially tend to be slightly lower than fixed, though they carry the added risk of skyrocketing far above as the contract continues, as illustrated in the below example.

Fixed vs Linked car payments

South Africa has seen eight interest rate hikes over the last 14 months, from a prime of 7.5% in January 2022 to 11.25% in March 2023.

To see how fixed and linked rates reflect on a monthly vehicle repayment, we can use a hypothetical example of a R500,000 vehicle purchased on a finance plan at the start of 2022.

Assuming a five-year contract, a 0% deposit, and a 0% balloon payment; this is how the past year’s lending rate fluctuations would have impacted the monthly instalment.

Click to enlarge