What Is an Adjustable-Rate Personal Loan?

It pays to consider your options when shopping for a loan. Not only do you want to find a good interest rate for your personal loan, but you need to figure out whether you prefer a fixed-rate or an adjustable-rate loan. Here, we'll discuss how an adjustable-rate loan works, the pros and cons of an adjustable-rate personal loan, and how to decide if an adjustable-rate loan is best for you.

What is an adjustable interest rate?

An adjustable interest rate usually starts out low, but that low rate only lasts for a short time. After that, the interest rate can change. Because your rate doesn't stay the same, your monthly payment doesn't stay the same, either.

Adjustable-rate loans normally have a "rate cap" in place, which means the interest rate can never rise beyond that limit. An adjustable-rate loan is only right for you if you're prepared for the potential interest rate increase (and a higher monthly payment) down the road.

Pros and cons of an adjustable-rate loan

Here, we'll cover what's good and not so good about adjustable-rate loans.

Pros

• Low starting interest rate
• Your rate might go down when it's time for a rate change
• With a low initial rate, you have the opportunity to chip away at the principal balance (the amount you originally borrowed) at a faster pace

Cons

• Monthly payment could change from month to month
• Interest rates could rise quickly

Should I get an adjustable-rate personal loan?

If the idea of rising interest rates and increased monthly payments makes you nervous, you might be better off looking for a fixed-rate loan (a loan that always has the same interest rate and monthly payment). An adjustable-rate loan can be a good idea if the monthly payment fits easily into your budget, whether the interest rate goes up or down.

You may also want an adjustable-rate personal loan if you plan to pay the loan off quickly. Let's say you receive an annual bonus from work or a tax refund each spring. You plan to borrow money and pay it off a few months later using this extra cash. By opting for an adjustable-rate loan, you'll take advantage of the low interest rate (and pay it off before the interest rate changes). Before you dive into a plan like this though, make sure your lender does not charge a penalty for early payoffs.

In the end, whether you opt for a fixed-rate or adjustable-rate personal loan, it's important to ask your lender lots of questions. The best personal loan lenders will spend time walking you through different loan types, helping you understand how each impacts your financial health.