Fixed Rate vs. Variable Rate Loans

Loans are an essential part of an economy’s health, and there are a number of different types of loans to choose from. Interest rates are a deciding factor with whether or not a borrower will apply for a certain type of loan. The most notable types of rates with loans are fixed rate loans and variable rate loans. Each type of loan is designed to fit the financial planning of the borrower. Fixed rate loans are loans that have an interest rate that is not affected by market rates. The interest rate on a fixed rate loan also doesn’t change or fluctuate during the life of the loan.

Instead, the fixed rate loan will have an interest rate that will remain the same. On the other hand, variable rate loans have an interest rate that is affected by market rates, and the interest rate on a variable loan will fluctuate during the life of the loan. However, most variable rate loans have a fixed rate period as well. For example, typical variable rate loans will have a fixed rate in the beginning of the loan. After the maturity of the fixed rate period, the interest rate will adjust to a new rate.

The difference between fixed rate loans and variable rate loans will both have their advantages and disadvantages. In order to identify which loan is right for the borrower, the borrower must be aware of their short term goals as well as their long term goals. Borrowers who are planning on paying their loan for the full term of the loan are advised to get a fixed rate loan. The interest rate on a fixed rate loan is typically lower than the interest rate on a variable rate loan that has passed its fixed rate maturity date.

On the other hand, the variable rate loan will have a lower interest rate than a fixed rate loan in the beginning of the loan. But after this period, the interest will most likely be higher than a fixed rate loan. Those who are planning on paying the loan off early to avoid the higher interest rate that a variable loan will impose on the borrower are advised to use a variable rate loan. As long as the loan is paid off before the fixed rate period of the loan is over, the borrower will avoid the higher interest rate while paying a lower interest rate than they would on a fixed rate loan.

Another factor to consider is the market interest rate. Even though a variable rate loan will mimic the market interest rates that are on the rise, they will also mirror the interest rate if the rate is lowering in the markets. This gives the borrower a chance to take advantage of lowered interest rates in the markets. A variable rate loan will still have its fixed rate period, but after that period is over, the rate will mirror the market rates, even if the rates are low.

It’s kind of like refinancing the loan for a lower interest rate without actually refinancing, if the market rate has lowered. Those who have fixed rate loans will not be able to take advantage of the lower market interest rate, unless they are able to refinance their loan. It basically comes down to the needs of the borrower, and what the borrower is planning on in the future. Some will choose a variable interest rate loan because they feel interest rates will drop in the future, or they are planning on paying the loan off early. Those who use fixed rate loans are not planning on making adjustments to their loan in the future.