by Christy Bieber | June 10, 2019
Variable rate personal loans can be a great option, but make sure they're the right choice for your situation.
When you apply for a loan, the interest rate is one of the most important terms you agree to. The rate determines both your monthly payment along with the total cost of borrowing.
With many types of loans, including personal loans, mortgage loans, and car loans, you’ll have a choice of a variable or a fixed rate. There are pros and cons of both variable and fixed rate loans, so you need to understand the differences and consider the relative advantages and disadvantages when deciding which type of personal loan is right for you.
Fixed rate loans are exactly what they sound like: They are loans with a fixed interest rate. The interest that you pay to borrow never changes throughout the life of the loan. If you get a personal loan with a 9% fixed interest rate, your rate will still be 9% one year, five years, seven years, or 10 years from now -- no matter what happens to market rates in the meantime.
Variable rate loans also have a name that describes what they are: loans with a variable interest rate, or an interest rate that can change during the time you have the loan. Variable rate loans don’t just change interest rates randomly on the whim of the lender, though. The loans can change rates on a fixed schedule, and the interest rate is typically tied to some financial index. For example, you might get a variable rate loan that moves up or down with the Prime Rate or with the LIBOR index.
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When you apply for a variable rate loan, it’s important to understand how often the rate can change, as well as the maximum and minimum interest rates you could be charged for the loan. Knowing this information can help you to make an informed choice about whether a variable rate loan is a viable solution.
Fixed rate personal loans have some significant advantages for borrowers -- but some disadvantages, too. Here are some of the pros:
However, some of the disadvantages include the following:
There are also some definite advantages to variable rate loans:
You also need to think about the following disadvantages:
As you can see, the choice of whether to get a variable or fixed rate personal loan is a difficult one because there are significant pros and cons to each option. You need to think about your risk tolerance, your budget, and what the total cost of the loan could end up being so you can decide which borrowing option is right for you.
In general, though, if you couldn’t afford the maximum payment you could end up owing on a variable rate personal loan, you’re accepting a huge risk that may not be worth taking.
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