Fixed-rate Vs Variable Rate Loans: Which Is Best for You?

Several loan options exist, and one factor that affects a consumer’s choice is the interest rate. The interest can either be fixed or variable. If you opt for a secured loan, it will mostly come with a fixed interest rate. However, many lenders also offer variable rate loans, particularly unsecured ones.

But what are interest rates and how do they work?

When you borrow money, you pay for that amount over a period of time, along with other costs, including the interest. The interest you will pay will depend on the amount you borrowed, the duration of the loan, and the current interest rate.

If you have dealt with some lenders before, you will notice that they have varying interest rates. You may have even observed that your rate is different from your friends’. That’s because the interest is determined through the following:

• The risk of the loan, particularly your risk as a borrower based on your credit history and the amount loaned to you
• Inflation in which the increase in price causes purchasing power loss for the principal
• Other conditions set by the lender

Your purpose for borrowing money will grant you an interest rate quote, which is known as the nominal rate. This rate can change from time to time. Because inflation influences lenders’ decisions to a large extent, financial organisations see a consumer’s risk as a crucial factor in offering the interest rate. This rate can be fixed or variable.

What are the differences between the two? We’ll explain to you the pros and cons of each interest rate, so you can understand them and pick the better choice for your situation.

Fixed-Rate Advantages and Disadvantages

In a fixed-rate loan, the interest does not change throughout the whole borrowing period. For most borrowers, this loan is the better option, especially for those who like predictability. Since the interest remains the same, the cost of the loan will not change until the time it is fully paid. The market may fluctuate, and the finance industry loses a little bit of its power, but you can count on your loan’s interest to stay constant.

Aside from the unchanging interest, are there any more benefits? Here they are:

• If you took care of your credit history by paying your bills and debts on time, this is your reward. Lenders will see your record, and they will give you low-interest offers. A fixed-rate loan product is mostly based on creditworthiness.
• Since fixed-rate loans are often secured, meaning they require collateral, you can borrow a larger amount.
• The life of the loan is often longer, ranging from one to 10 years, allowing you to make smaller payments that you can easily afford.
• If you follow a personal budget, which you should stick to for the next few years, fixed-rate loans can significantly benefit you.
• If the current market looks unstable, you may want to take advantage of a fixed rate offer. You can lock in a lower interest now before the rates shift.
• Fixed-rate loans have fewer features. However, most of the add-ons just complicate the loan and even increase the costs.

Now, we’re going to see if those benefits outweigh the drawbacks, which include:

• If the interest rates change and they decrease, you cannot gain from the situation.
• If you plan to switch to another loan, you could end up paying more. You may have to pay a break fee, which is charged against you for breaking your loan. This fee can be extremely high, especially if the interest rates have reduced since the time you took out your fixed-rate loan.
• Some lenders have early repayment fees, meaning you cannot pay the loan at an earlier time unless you’re prepared for the additional charges. It’s a huge disadvantage, particularly if your circumstances change.

The stability of this type of loan, along with the other benefits mentioned, may work for your current situation. However, it’s always best to learn about your other options, conditions, and requirements of the loan and lender.