You Should Have This Type of Personal Loan Right Now

If you're thinking of borrowing, read this first.

Taking out a personal loan can be a smart way to finance things you can't afford to pay for upfront. It can also be a good way to consolidate and refinance costlier debt, such as credit card debt. But you need the right type of loan with favorable terms, since one of the biggest benefits of personal loans is they tend to be a more affordable way of borrowing.

In particular, personal loans can be divided into two different categories and, right now, it's more important than ever to make sure you pick the right one.

Make sure your personal loan has this type of rate

The two categories that personal loans can be divided into are:

• Fixed-rate loans
• Variable-rate loans

The names of each loan type gives away the details. A fixed-rate loan has a rate that is fixed. It does not change over the entire time you are repaying the money you borrowed. Since your loan rate is set in stone, your monthly payment does not change nor does the interest you owe. You will know the total cost of borrowing when you take on the debt and you will know exactly how much it is going to cost you each month so you can budget for it.

A variable-rate loan, on the other hand, has a rate that can vary. Specifically, the rate will be linked with some type of financial index. The rate can fluctuate during your repayment period, and if it goes up, your monthly payments could increase since you will still have to repay the loan by the same set schedule. More of your payment each month will simply go toward your higher interest costs. And your total costs will go up.

Variable-rate loans sometimes seem attractive since lenders typically offer a lower starting rate than you would get if you took out a fixed-rate loan. But the problem with that is you are taking a huge risk. And right now, that risk is not worth it because interest rates have been going up and are likely to continue to do so.

Inflation has hit a 40-year high, and the Federal Reserve (the U.S. Central Bank) is working to tighten the supply of money to try to bring price increases back down to a more manageable level. The Federal Reserve has raised rates several times and indicated another rate increase is likely this year.

Since rates are going up, your variable-rate loan is almost inevitably going to get more expensive. So don't take the chance of having to pay more down the line when the odds are very much against you.

What should you do if you have a variable-rate personal loan?

If your loan has a variable rate, chances are your payments have already gone up and could continue to rise in the future. You may want to look into refinancing into a fixed-rate loan if you can find one with affordable payments so you won't face further rate hikes. Or, depending on how high your rate has climbed, you may want to think about trying very hard to pay off your loan early so you can avoid getting stuck with extra costs.

Your personal financial situation will dictate if these options are available on existing loans. But if you are taking out a new loan, be sure to opt for a fixed-rate loan so you don't get stuck with a type of financing that's all but certain to become more expensive over the coming months.