Which is Better: A Fixed Rate or a Variable Rate Loan?

Taking a loan is one of the toughest decision of life because it can change the course of your loan in the upcoming time. It is better to do your research before you take a loan as there are many different types that you should be aware of and you should know that which one is best for you. When you will do research, you will find out that there are fixed rate loans and variable rate loans that you can take. Before deciding which to take, you have to consider many factors.
If you think that fixed rate loans are much better than this is not the case every time as it depends upon certain conditions. So it is sometime better and sometimes variable rate is better.

 

Which Loan Is Better?

Today we will find out that which loan is better, according to a stat, people who have variable rate loan pay less amount of interest money than people with a fixed rate loan. But this depend on a number of different factors.
One of the factors to keep in mind is the time that it will take to pay off the loan. It has a significant impact on the amount of money that you will pay in interest. Another factor to keep in mind is the current interest rate environment because interest rates has increases widely in the past few years. The interest rates have increase from 3.31% to as high as of 18.61 in the last 5 decades.

Interest rates depends upon a number of different factors, firstly the fed fund rates are set by the Federal Reserves that plays a vital role in setting up variable and fixed rates. Banks and investors priorities also decides the interest rates, thus these three forces have the main hand in setting up the interest rates.

If you know the right information, you can easily choose the best loan term for yourself, so let get in depth of these loans so that it could be easy for you.

 

Fixed Rate Loan

Fixed Rate Loans are simple and easy to understand, these are the loans in which the interest remains the same until the loans ends, even if there is an increase in the interest rate in the market, it will not affect your payment and you will pay the same percentage for the whole of your loan. Most of the loans in the past were of fixed rate loans. We can get fixed rate loans from all type of loans such as car loan, mortgage or a student loan.
If the rates are rising then the best decision to take is to take a fixed rate loan because that will keep the same rate for the whole time period of the loan and you can easily calculate the amount of interest that you will have to pay. But if it is the opposite of the above picture and the rates are gradually decreasing, then if you have a fixed rate, you will be paying more money than others in the town because you will be still paying the old fixed rate. The solution to this is refinancing but this is not the best decision every time as you have to pay an application, origination fee or the closing cost sometimes. Thus you need to calculate carefully before you can refinance.

The duration for which you are taking a loan and the type of the loan plays a vital role in determining that whether a fixed rate will be more preferable or a variable rate for yourself because a longer time loan will have a different impact than a shorter time loan. So it is better to do the calculations first.

 

Variable Rate Loan

Floating Rate loans or variable loans are not that easy to understand like fixed rate loans. These loans come with a lower rate than of a fixed rate loan but the rate change with the market fluctuations. The amount of money you will have to pay in interest will depend on the interest rate at that time and it will change with time. So you cannot calculate the fix amount that you will pay before the time. The change in interest rate only effects on your remaining balance and you only pay on that.
There are different kind of variable loans, so make sure you know, which one you are choosing. The rate fluctuate because these kind of loans follow a banking index. The rate changes monthly when-ever banks borrow money from one another on their desired rates. As the rate changes monthly, so it will change the amount of money you will have to pay monthly every month and also change your expected interest amount.
The rate indexes are published by third parties and if you are going to take a variable loan rate, than make sure you know which index is being followed by your lender. In some cases, the lenders puts up a limit on the rise of interest rate and the rate does not increase from that specific rate even if it increasing in the market. Having this facility on your variable loan can help you from many issues.

 

Which type is better in Mortgage loans?

Mortgage loans are one of the important loans of your life because it can change the course of your life for the upcoming years. So taking the best possible type of loan is important. When you want to take a mortgage, study the interest rate fluctuation of the last ten years, it will give you a complete picture of the ups and downs of the interest rate.

If the rates are lower than the past, then it is better to get a fixed rate loan because it will keep you to a lower interest rate for the course of the loan. If the rates are higher than the past, then it is better to get a variable rate loan and you can refinance that loan when you get a lower mortgage loan. When you buy a home on variable rate loan then it makes it more comfortable in the first year because they have less monthly payment and a lower interest rate than a fixed rate loan. Variable loans are also preferred if you want to stay in the house for a shorter period of time and then you have plans to sell it.

 

Which type is Better in Student Loans?

Student loan can change your financial picture in the crucial years of your life so it is important to get the best loan in this category. Student loans are of basically two types, federal loans and private loans. Federal loans are fixed rate loans and they come with a lot of facilities. You can have payment plan according to your income, you can apply for forbearance or deferment program and you can also apply for loan forgiveness program if you are eligible. So it make sense that your first priority should be federal loans because there is no such facilities in the private loans.

Private loans could of both fixed rate and variable rate and if you are unable to get a federal loan then the only option you have is the private loan. A variable rate can help you save money in the start but it will go up after sometime so if you want to enjoy in the start, then you should get a variable rate loan. Before you get a loan, make sure you check the rules and regulations of the loan first because once you agree with the terms, you will have to repay accordingly.
Student loans are becoming a problem in the US in the recent years. Students are getting graduated with a huge debt on their shoulders and it is getting difficult for them to repay the loan and start their professional life at ease. So it is better to a get a federal student loan.

 

Which One to Choose?

When you want to take loan, there are two factors to keep in mind before you decide to take a fixed or a variable rate loan. The first one is your financial situation and the second one is the condition of the market. We cannot say that one is the best or one is better than the other, which one is better one for you will completely depend upon your financial picture.
When you have a fixed rate loan, then there is no chance of increased payments and you will pay the same amount for the course of your loan while if you have variable loan, you will enjoy some savings initially but you will have to be prepared for the increase in rate sometimes.

 

Conclusion:

So I have gone through the ups and downs of the fixed and variable rate loans and now it is up to you to decide for yourself. Make sure you calculate it right and guess the market fluctuations so that it could end up in a win situation for you. Do comment in the section below and let us know if you have any queries regarding the article because we would love to hear from you.

Joseph has been freelance writer for the past 7 years, he loves to read, write and loves his pet dog Oliver (we love it when he comes to the office) Joseph likes to share his passion for saving money and puts it into words.

Posted on: 10/23/2020

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