When it comes to mortgages or personal loans, there are two main types, fixed and variable. Both have their own unique benefits and drawbacks, so it’s important to understand the differences before you decide which is right for you.
There are many factors to consider when choosing a personal loan, and it can be overwhelming. However, one of the most pressing concerns is whether to go with a fixed or variable interest rate.
Although you can choose between a fixed and variable rate depending on the loan, it’s essential to consider the differences before deciding which personal loan is best for you.
Fixed rate loans
A fixed interest rate is a loan where the monthly payments stay the same.
A fixed interest rate personal loan is a secure way to borrow money – you’ll know exactly how much you need to repay, and your payments won’t change over the life of the loan. You also don’t have to worry about future increases in interest rates.
- Certainty in repayments: Your interest rate and repayment amounts remain unchanged during the fixed term, making budgeting easier.
- Protection against rate increases: You’re insulated from any interest rate rises during the fixed period.
However, you’ll miss out on possible rate reductions.
If you have the opportunity to make lump sum payments or additional payments to settle your loan early, remember that lenders often charge a fee or penalty for this action. These extra costs could cancel out any potential savings, so be sure to weigh all options before making a decision.
Variable rate loans
Compared to fixed interest loans, variable rate loans offer more flexibility. For instance, you might be able to get longer repayment terms and the option of paying off the loan early without any charges.
- Flexibility: These loans typically allow unlimited extra repayments and offer features like redraw facilities and offset accounts.
- Potential savings: If interest rates decrease, you’ll benefit from lower repayments.
- Easier refinancing: It’s generally easier to switch lenders or loan products without incurring break costs.
If some lenders permit it, borrowers may be able to access extra money they have already paid on their loan. Be conscious that there might be limitations placed on the amount you can withdraw and additionally, withdrawing could come with additional fees.
The comparison of fixed and variable rate loan
The choice between fixed and variable rates depends on your personal circumstances, financial goals, and risk tolerance. Some borrowers opt for a split loan, combining both fixed and variable portions to balance certainty with flexibility.
When deciding, make sure you consider all the factors such as:
- Your ability to handle potential rate increases
- The current interest rate environment
- Your need for loan features like offset accounts or redraw facilities
- Your plans for the property (e.g., selling or refinancing in the near future)
Just because a loan works for other people, doesn’t mean that it will work best for you. If you’re undecided between opting for a variable or fixed rate personal loan, your next step might be to contact a financial advisor and explore the various options available.
