Loans are many choices as well as purpose. They serve a myriad of needs by providing funds for short-term and long-term needs. Their cost calculation depends on the rate of interest that has different types. However, usually, two significant types of rates of interest apply to most of the loan choices they are fixed-rate and variable rate.
For borrowers, it is always a matter of doubt that which type of rate is a better option and more affordable. Perhaps a comparison can help us understand the difference between the two and also make a clear choice while obtaining funds.
|Fixed-rate loan||Variable-rate loan|
|A loan that remains the same in the interest rate during the whole tenure is called a fixed-rate loan.||Variable-rate, as the word denotes, keeps the loan volatile in cost throughout the tenure. It changes according to the market change.|
One (-) and one (+) point of fixed-rate and variable rate Loans
To know what type of rate policy is better, it is vital to know the actual nature of both types of interest rates.
- Fixed rate (Benefit + Drawback) –
Benefit – The rate remains similar during the whole tenure, which facilitates the same installments the whole time. This feature makes the obligation predictable.
Drawback – If the market goes down and also the interest rates, you cannot bear the benefit of smaller instalments because you have a fixed-rate loan.
- Variable-rate (Benefit + Drawback)
Benefit – If the market rate reduces during an economic change, you can enjoy smaller instalments. You can also manage to do prepayments to close the loan early.
Drawback – If the market rates go high, you have to bear a bigger loan instalment that can drastically disturb your personal finances.
Your Financial Condition Is Also Decisive
After all, you take a loan for your personal financial needs. It means they take the actual decision. For those who want stability in finances without any vicissitudes should choose the fixed-rate loans.
Those who want to explore the opportunity of a low rate of interest whenever possible can go for the variable option. However, for the latter choice, one should be able to handle the change in the monthly instalments.
Varied people have varied reasons to accept loan types. Some people with weak financial conditions may want to get variable rate loans. If they have the confidence that they can manage the repayments, it is not a bad idea. At least, they can get the benefit of a smaller instalment if the loan prices go down.
IMPORTANT FACT – Affordability is a dominating factor. Sometimes the borrowers want a particular type of interest rate but cannot get due to weaker affordability. For instance – those with a weak repaying capacity cannot get fixed rate in the mortgage. For that, one needs to have a strong repaying capability.
Interest Rate Caps Reduce the Gap between Fixed and Variable Rate
The fixed rates are indeed preferred due to their static nature, but something is there that makes variable-rate bearable. The culture of the finance industry to cap the interest rates makes the variable rate loans affordable.
To tame the extreme hike of the loan cost, interest rate cap make the borrowing predictable and easy for the borrower. He knows every time that up to which limit the interest rate can go and accordingly can manage his personal finances.
Did you know? The interest rate cap sets not only a maximum limit but also a minimum limit.
Loan Type Is another Important Factor
Short-term loans have a different impact on your personal finances, and long-term loans affect in the other way. According to the tenure and type, the decision of choice of interest rate becomes easy. Usually, when it comes to long-term loans such as a mortgage, people prefer variable rate.
It is also due to the factor that in the mortgage, the fixed-rate options have a limited duration of the same rate. In a fixed-rate mortgage, the rate of interest can remain static maximum for 5 years. After that, variable rate rules apply naturally.
Financial Stability Has Significance
Financial stability becomes the prime cause in the selection of the type of interest rates. Those with stronger personal finances typically prefer to make fixed-rate loans. They do not want to play with the uncertainty of the market.
What if tomorrow, the lending market goes high and interest rates go up? Their loan installments will fatten up, leaving their wallets almost empty. Usually, financial advisors also suggest people with poor financial condition to obtain a fixed rate option. The borrowers of the bad credit loans no guarantor prefer to keep their obligation predictable by avoiding variable interest rates.
Don’t Forget to Consider the Purpose of Borrowing Loans
Your purpose for borrowing is also noteworthy. A holiday loan may act better for your finances if it is variable because the money is not borrowed for some financial issue. On the other hand, a person applying for the Quick loans in Ireland prefers to go for a fixed-rate loan. Already it is difficult for him to tackle the money crisis. In that case, it can be crazy to let the volatility of the market affect the repayments.
Students that borrow funds for educational purpose are also more inclined to a fixed rate. They want to keep their expenses the same for as long as possible. Their money management plans match more to this sort of loan. However, some students who understand the benefits of variable rate loans want to take them and exploit the related benefits.
The above points show the varied aspects of the fixed-rate loans and the variable rate loans. They both are useful and beneficial for their reasons. For some borrowers, the fixed rate is essential, and for some borrowers, the variable rate is more significant. The best thing is that both are available in abundance in the market. One similarity between the two is, for both versions, you need to have a stable repaying capacity. Prove it and experience your financial peace.