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Is a Personal Loan Variable or Fixed Rate?

Personal loans differ from mortgages or car loans because you can use the cash for anything, be it credit card debt, home renovations, or unexpected expenses. The money isn’t tied to one specific purchase. Personal loans don’t require you to put up collateral, either. But one of the things you need to know before going into debt is: are personal loans fixed or variable?

The answer is, they can be both. Before signing that dotted line, it helps decide if variable or fixed rates work better for your situation. Let’s delve deeper.

What is a Fixed Loan?

A fixed-rate personal loan keeps the interest rate the same for the entire term. Fixed-rate personal loans let you know exactly what your monthly payments will be ahead of time, which makes it easier to budget and manage your money.

With a fixed-rate loan, the interest rate is set at the start based on factors like your credit score, typical rates, and the lender’s policies. Once set, your rate stays the same no matter what happens to the industry.

When Should You Get a Fixed-Rate Personal Loan?

Fixed-rate personal loans can work well when the economic climate results in unstable interest rates. They make budgeting easier since your monthly payments stay the same. These loans also allow you to consolidate high-interest debts, potentially saving money on interest. They give predictable repayment schedules and allow you to lock in low rates.

Financial experts see fixed rates helpful when you require stability. They provide consistency if your income stays relatively high and you have decent credit. Overall, fixed rates remove some uncertainty when used wisely.

What is the Benefit of Having a Fixed Interest Rate Loan?

Fixed interest rates on loans can be helpful for budget planning. You always know your monthly payment, making it easier to determine what you can and can’t afford each month. It’s nice not having to stress about the payment going up or down depending on interest rates.

Another bonus is that fixed rates protect you if interest rates go up. If you have an adjustable rate that can change over time, you might get stuck with a more significant total loan cost. But with a fixed rate, what you first signed up for is what you’ll keep paying for the whole loan life.

Drawbacks of Fixed Rate Personal Loans

Fixed rates on personal loans are excellent since you get more predictability. However, these loans also have disadvantages that you should consider. 

  • High-interest rates. You might get stuck with a higher rate than on a variable loan. Lenders look at the market and make their best guess at where rates are headed. To play it safe, they set fixed rates higher.
  • Additional fees. Fixed-rate options may incur additional fees if the borrower wants to change terms or repay the loan early.

How to Get a Fixed-Rate Personal Loan?

Getting a fixed-rate personal loan involves several steps but doesn’t have to be complicated. Check out these stages to learn how to get one.

  1. Shop around. Look around at different banks and lenders to see who offers reasonable rates.
  2. Check the application requirements. Compare each lender’s specific interest rates, fees, eligibility criteria, and repayment rules. Ensure you also get all the paperwork you need ready—proof of income, job info, ID, etc.
  3. Apply online or in-store. Once you pick a good option, fill out the loan application form. You should find lenders with pre-qualification options that don’t affect your credit score.
  4. Check the loan offers. Look closely at the interest rate and fees the lenders charge and how long you’ll pay them back.
  5. Sign the loan agreement. Choose the option with the best terms and conditions and sign the loan contract.
  6. Receive your money. The lender will transfer the fixed-rate loan to your bank account within 1 to 5 business days, depending on its policy and your bank cut-off times.

What is a Variable Rate Personal Loan?

Variable-rate personal loans can be tricky. The interest rates go up and down depending on things like the prime rate or LIBOR, which is some banker term. If those rates increase, your interest rate goes up, too. It means your monthly payments would increase. But if those rates go down, your rate drops, and your payments decrease. The beginning interest rates are usually lower than on fixed loans. Such products seem attractive if the rates are about to fall or you want lower start payments.

Advantages of Variable Rate Personal Loans

Variable-rate personal loans can be a good option for some borrowers because of their flexibility and potential cost savings. Two main benefits are:

  • Lower starting interest rates. When you first take out a loan, variable rates are often lower than fixed rates. Your initial payments would be less, saving you money upfront. Of course, that could change later. If you want lower costs initially, it’s something to think about.
  • Possible savings if rates decline. With variable-rate loans, your interest rate floats up and down with the market.  So, if benchmark rates drop, your loan rate would, too. That would decrease your monthly payments and overall loan costs over time. It lets borrowers take advantage of market fluctuations. With fixed rates, you’d be stuck paying the original higher amount no matter what.

Drawbacks of Variable Rate Loans

Variable-rate loans also have some significant downsides borrowers must consider before signing up. Here are two main drawbacks:

  • Variable rates make budgeting challenging. With fixed rates, your payment stays the same the whole time, but variable rates move up and down with the market, so your payment is constantly changing. That uncertainty makes planning hard, especially for people with little wiggle room in their budgets already.
  • Risk of rising rates. While variable rates start lower, over time, there’s always the possibility that rates will go up. Thus, your payments and overall loan cost will suddenly become more extensive. If rates increase, it can stretch a tight budget to the breaking point. People might end up paying way more than they ever planned.

What To Consider Before Borrowing Variable Rate Loans?

Here are a few things to think about before going with a variable-rate loan: 

  • Interest rates move up and down, so your monthly payments could, too. Make sure you’re good with handling that.
  • Check out what experts say interest rates might do shortly. If they are about to fall, there is a good time for a variable loan.
  • Ask yourself how much risk you can handle. Adjustable rates start lower than fixed ones but could jump up over time. Decide if you want to take that chance.
  • Map out budgets that account for potential payment hikes. You should be ready for higher rates so they don’t break the bank.
  • Look at the fine print on the loan. Make sure to know how often and by how much your rate can change, the maximum it can reach, etc. That’ll clue you in on a maximum impact on your finances. 

How Your Credit Score Affects Personal Loan Interest Rates

Your credit score directly affects the interest rate on a personal loan. Lenders look at your score to determine how likely you are to repay a loan, meaning how creditworthy you seem. Consumers with high scores make their payments on time and manage money well. Lenders see them as less risky and offer them lower interest rates. But if your score is low, it can mean higher risk for a lender, so they might slap you with a higher rate.

What are the Interest Rate Caps?

Interest rate caps limit how much a variable interest rate can increase over time. There are usually two kinds of caps: periodic caps that limit how much rates can increase at certain intervals, like each year, and lifetime caps that limit the total rate increase over the entire loan term.

The periodic caps are straightforward. Say you have a 1% cap each year. This means that if your rate starts at 5%, the most it could go to the next year is 6%, and then 7% the year after. The lifetime caps work by setting a maximum rate increase from when you first get the loan to when you pay it off. A 5% lifetime cap means your rate can never get 5% higher than what you started with.

These interest rate caps assure borrowers that their payments won’t suddenly skyrocket if rates spike rapidly. However, you should still closely read all the fine print in your loan documents to see precisely what caps they have and what limits apply.

How to Choose Between Fixed and Variable Rates?

Choosing between fixed or variable rates requires pondering your money sitch and gut for risk. That’s why we decided to provide expert advice to ease your mission.

Consider your risk tolerance.

How comfortable are you with uncertainty? Going fixed means you lock in your rate for the whole loan. Variable rates fluctuate, so your monthly payments could change over time. If predictability is vital, fixed rates let you plan without surprises. But if you can handle some fluctuation, variables may start lower.

Budget flexibility

Can you ride out higher payments if rates rise? Variables carry some risk that rates increase down the road, raising your monthly dues. If tight budgets are an issue, that unpredictability could strain things. Fixed rates offer consistency, which helps with planning if you need to pinch pennies.

Interest rate predictions

Where do the experts think rates are headed? If they predict rises, locks could save you money in the long run. But if the forecast looks suitable for declines, variables allow you to take advantage later. Timing the market is tough, but checking rate forecasts can provide clues on advantages.

Repayment terms

While the long-term economic outlook remains uncertain, you can make decisions based on short-term conditions if you don’t anticipate holding onto the debt for an extended period. Fixed rates are essential when purchasing a home but variable ones may work better for shorter-term debts.

Suitable Alternative to Check

If you’re going to buy a house, you may choose hybrid adjustable-rate mortgages (ARMs). These loans give you a set rate for the first handful of years and then switch to an adjustable rate after that. They’re kind of a mix between fixed and adjustable rates. They could be good if you want some stability upfront but don’t plan on keeping the loan forever.

Also, consider how long you want to stay in the house and if you might move or refinance your mortgage. If you know, you’ll be there awhile, locking in a fixed rate for the whole loan makes sense for that stability. But if you sell in a few years, an adjustable rate or hybrid ARM could work out better since you won’t pay the fixed rate for as long.

Tips & Tricks to Save Interest on Your Loans

You can lower your interest rate and save some money if you follow these tips:

  1. Make extra payments when you can. Even a little bit extra toward the principal will reduce the balance and interest charges over time.
  2. Refinance. If rates have dropped since you first got the loan, consider refinancing with a lower percentage.
  3. Consolidate debt. If you have multiple high-rate loans, consider rolling them into one with a lower overall percentage. It also streamlines things into one payment instead of many.
  4. Negotiate with the lender. Contact the lender as well to see if they can adjust the rate or terms. If your payment history is good, they may be willing to work with you.
  5. Pay your bills on time. Late payments result in fees and penalties, which cost more money.
  6. Set up automatic payments so you never miss a payment. Some lenders offer a discount on your interest rate when you do this.   
  7. Keep an eye on your credit score by managing debt carefully. Good credit means better rates on future loans, saving cash over time.

Bottom Line

Asking yourself, “is a personal loan variable or fixed rate?” may lead to a decision-blocking period. That’s why, when deciding between a fixed or variable-rate personal loan, you should weigh the good and bad of both choices.

Fixed-rate loans let you lock in payments, so budgeting is a breeze. However, variable-rate loans can start at a lower cost, even if the payments increase later. You are advised to look at your income situation, how steady it is, the whole interest rate scene, and how much you can handle payments bouncing. Doing all that makes it way easier to pick the right loan for your needs.

Learn more:

  1. What Credit Score Is Needed For A Personal Loan? – https://www.badcredify.com/guides/minimum-credit-score-for-a-personal-loan/
  2. Personal Loan Eligibility Requirements: Things To Know Before Applying – https://www.badcredify.com/guides/personal-loan-eligibility/
  3. Understanding Interest Rates: Key Concepts Every Consumer Should Know – https://www.badcredify.com/guides/understanding-interest-rates/

External sources:

  1. Predictable repayment schedules – https://fastercapital.com/topics/the-different-types-of-repayment-schedules.html 
  2. What is LIBOR – https://www.imf.org/external/pubs/ft/fandd/2012/12/pdf/basics.pdf 
  3. National Rates and Rate Caps – https://www.fdic.gov/resources/bankers/national-rates/index.html