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TCALoans.com » Learning Center » Personal Loans » Fixed Rate Loans vs Variable Rate Loans

Fixed Rate Loans vs Variable Rate Loans

Taking out a personal loan needs a lot of consideration. One of the things you need to focus is how to make your repayments work for you. The most important factor is the amount you pay on the interest rate of your loan.

There are two kinds of interest rate plan on personal loans, of which you can choose from.

Fixed Rate Loans

The fixed rate loan option, allows you to set your loan on a predetermined charge, with the term ranging from 1 to 5 years. Some would even opt for it until the maturity of their loan. This is mostly for people who want to carefully budget repayment. It gives them a sense of security and certainty by planning and knowing exactly how much they need to pay every payment time. Like any other payment plan, the fixed rate loan has a downside: Though it can be good for your budget planning, the main disadvantage is while your interest rate is lower during high-interest periods, it can be higher during lower interest periods – than for those on a variable rate loan agreement. In addition, most lending companies penalize borrowers for making additional repayments, effectively canceling out your ability to pay out your debt sooner.

Variable Rate Loans

The variable rate loan interests are subject to rate fluctuations. You don’t have the assurance that the interest rate you are obligated to pay will stay the same. You may be paying a higher interest rate now and pay a smaller interest with a lower rate on your next payment. You have to keep an eye on the interest rates from time to time, to plan your budget on your payment schedule. Variable rate loans are often preferred to fixed-rate loans. The reason is that the interest rate of a variable rate loan is usually low at the beginning. The downside is that it may increase with time, dependent mainly on the market rates at the time. The lender often starts with a low-interest rate to encourage people to accept the loan terms offered. This type of loan system is excellent for those want to clear off their debt in a short time.