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Although taking out a personal loan is easy enough, there are several important decisions you'll need to make. For example, you'll need to decide whether you want an unsecured loan or a secured loan, and you'll be expected to know whether you want a fixed interest rate or variable interest rate loan. Here, we'll break down the differences between a fixed-rate and variable-rate loan so you'll be ready when the time comes.
A fixed interest rate is a rate that stays the same over the life of the loan. No matter what's going on with the economy, your interest rate never changes, so your loan payments stay the same each month. Most of the best personal loan lenders offer fixed-rate loans. If you're someone who appreciates stability and likes knowing what you can expect from month to month, a fixed interest rate may be the best option for you.
Let's say you've decided to make renovations to your home and need a personal loan to make it happen. As the borrower, you have some decisions to make. You're told that you have access to an adjustable-rate mortgage (ARM). You learn that the initial interest rate will be set in stone for a specific period of time, and that sounds good to you. However, once that period of time is up, the interest rate on the loan will periodically be adjusted. Depending on what's going on with the market, the interest rate can either be adjusted up or down. And that makes you nervous. You want to know for sure how much your loan rate and the monthly payment will be throughout the life of the loan. While an ARM -- also referred to as a variable-rate home loan or floating rate loan -- might be perfect for a borrower who only plans to keep the loan for a short time, you're not confident that you'll be able to retire the loan before the final payment is due.
Instead, you opt for a fixed loan. Your credit score is high, so you lock in a low interest rate and feel good about the decision. You know exactly how much the annual percentage rate (APR) on the loan is going to be, are crystal clear as to how much your monthly loan payment will be, and have already come up with a repayment plan that will allow you to pay the loan balance off early.
While a fixed-rate loan is perfect for you, another borrower may feel better served by an adjustable-rate loan. Maybe they don't believe they'll carry the loan long enough to worry about paying a higher interest rate when the introductory rate expires. Perhaps they can easily afford the payment, even when rising interest rates lead to a higher monthly payment. To learn more about adjustable-rate loans -- and find out if they're right for you -- check out our guide to adjustable-rate personal loans.
Here, we take a look at what's great (and not so great) about fixed-rate loans.
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A fixed-rate personal loan is your best bet if you don't like financial surprises and want a loan payment (and interest rate) that never goes up. Whether or not you should opt for a fixed-rate loan or variable-rate loan depends on how you feel about risk and whether you can afford a higher monthly payment if the interest rate rises.
Deciding if you want a fixed-rate or adjustable-rate loan is made easier today by the low average interest rate for personal loans. When market interest rates are very high, borrowers sometimes opt for an adjustable-rate loan because those loans start with lower interest rates. But right now, market interest rates are low. That means you can get a low interest rate even if you choose a fixed-rate loan.
And while we're on the topic of today's low interest rates, take time to consider how a fixed rate vs. variable-rate loan applies to other loan types. For example, when you purchase a home, a lender will want to know whether you want a fixed mortgage or a loan with a variable interest rate. The same rules apply:
Take your time to consider if a fixed-rate loan and its predictable payments are the right fit for you. If the answer is yes, you know precisely which loan type to request, even before filling out a loan application. And it pays to be ready. You never know when you'll need an emergency loan to cover a flooded basement or unexpected medical expenses.
Looking for a personal loan but don't know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.
Looking for a personal loan but don’t know where to start? Our favorites offer quick approval and rock-bottom interest rates. Check out our list to find the best loan for you.
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