When to Choose a Fixed vs. Variable Interest Rate

article by Foster I. author
If you’ve looked into personal loans, then you’re familiar with the terms ‘fixed’ and ‘variable’ rates. For those who find the terms unclear, fixed rates are a set amount of interest that you’ll pay. This won’t change over time. Variable rates, however, will fluctuate higher or lower.

Of course, once you know the terms, the question then becomes which type of interest rate is best for you. Some people prefer fixed interest rates, while others swear by variable. Here are a few things to consider before you sign on the dotted line for your next online loan.

Long-Term Loans vs. Short-Term Loans

How long are you planning to take to pay off your unsecured loan? One year? Five years? Ten? Twenty+? The length of your repayment plan can actually give you a good indication as to what type of online loan to opt for. Short-term loans tend to do better with variable interest rates because the fluctuations in the rates won’t add all that much to your overall investment, while any savings are always welcome.

Long-term loans, alternatively, can accumulate quite a significant difference in the amount of interest you pay when spread out over several years. Even a few percentage points higher can add thousands of dollars to your personal loan payments.

Consider Your Temperament

Some people are naturally more cautious, while others are known as risk-takers. What type of personality are you? Depending on your answer to this question, it will give you a good direction as to which type of unsecured loan you should invest in. After all, if constant fluctuations make you nervous or on edge, variable rates won’t do well for your blood pressure. If you are financially (and mentally) comfortable with paying higher rates, however, it can certainly be worth the risk to hold out for those times when interest rates drop.

Not sure which type of temperament you have? Try playing the stock market for a little bit. Go online and test drive a free trial, so you don’t lose any money on the experiment. See how you invest, and this will give you a great indication of what type of loan to take out.

640x425_When to Choose a Fixed vs

Ask About Rate Caps

A term you may have happened upon in your research is a rate cap. This is a maximum amount that the lender can raise your interest rate to, and not any further. So if the market increases to a rate that is higher than your cap, the lender still has to remain within the capped amount. It is a sort of built-in safeguard from letting a variable rate loan get out of hand and seriously handicap your financial efforts to pay off your debt and move forward.

Caps for an online personal loan may average anywhere from 7.5% to 14.95%. This means that you’ll never pay more than this rate regardless of how high the global interest rate rises.

So, which type of loan is the right one? Let these tips guide you toward the most comfortable and reasonable decision for you.