When availing loan whether, home loan, car loan or personal loan, you have to choose between fixed-rate and variable-rate terms. Both terms can be beneficial depending on your situation. This is why you should make your choice wisely.
It is advisable to study your situation clearly and see what term will be most beneficial for you. And then that’s when you decide to go for that option.
In this article, we will discuss the difference between fix rate and variable rate to eventually help you decide which type of loan is suitable for you.
Fixed-rate loans feature a set interest rate that does not change throughout the life of the loan. Despite the amount of principal and interest paid each month varies from payment to payment, the total payment remains fixed. This is why this type of loan makes budgeting easy.
The main advantage of a fixed-rate loan is that the borrower is protected from any sudden increase in interest rates. They do not have to worry about abrupt changes in the monthly payments they pay. Therefore, they can easily set their budget and stick to it until they paid off all of their loans.
Fixed-rate mortgages are very easy to understand and it is almost the same from lender to lender.
The downside to this type of loan is that when interest rates are high, availing of loan is more difficult because the payments are less affordable.
However, you should take note that although the interest rate is fixed, the total amount of interest that you will pay will depend on the mortgage term. Traditional lending institutions like NPBS offers fixed rate home loans in various terms, usually 30, 20 or 15 years.
The 30-year mortgage term is the most popular because of the lowest monthly payment.
Variable-rate loans, also sometimes called adjustable-rate loans do not offer borrowers a one fixed interest rate over the life of the loan. The interest rate varies over time for this type of loan.
The initial rate for variable-rate loans is set below the market rate compared to fixed-rate loan and then the rate rises as time goes on. If the loan is held long enough, the interest rate will surpass the going rate for fixed-rate loans.
Adjustable-rate mortgages have fixed period of time during which the initial interest rate remains constant, after which the interest rate will adjust at a pre-arranged frequency. The fixed rate may vary significantly – from one month to 10 years. Shorter adjustment periods generally have lower interest rates.
This type of loan is attractive for borrowers because of the low initial payments. However, there is also downside to it like your monthly payment may change frequently over the life of the loan. It makes budgeting very challenging.
We’ve discussed the difference between fixed-rate and variable-rate loans including the pros and cons for each. It is your call now to decide which type of loan will be most beneficial for your case.