Even the slightest change in interest rate can have a big impact. For larger loans, we're talking potentially thousands in additional savings or costs. That's why when it comes to interest rates, it always pays to shop around.
But there are options available to you beyond simply choosing the lowest number. One such choice is between a 'fixed' loan and a 'variable' loan. What's the difference and can you save money? Read on to find out more.
What’s a fixed loan?
A fixed loan refers to a loan with a fixed rate of interest. When an interest rate is 'fixed', it does not change. Depending on the loan type, such as a car loan or a home loan, the interest rate could be fixed for only a certain period or over the entire life of the loan. With a fixed loan, you’ll always know how much your repayments will cost – whether that’s next month or in a year’s time.
What’s a variable loan?
On the other hand, there are variable interest rates. A variable rate has the potential to change: your interest rate could go down – or it could go up. With a variable loan, there are potential savings to be made on future repayments, but there is also the risk that you could end up paying more.
Fixed vs. variable loans – what’s the advantages of each?
Adjust interest rates on a loan calculator to see the how interest rate changes affect repayment amounts.
Many home loans are set using a variable rate. However, lenders may give you the option to ‘fix’ the interest rate for a period – often 1, 3 or 5 years. In contrast, most car loans only offer a fixed interest rate. However in some cases, it can be possible to get a variable rate with car financiers.
A variable loan will offer potential savings if interest rates decrease – but this also means that you’re exposed to increases in interest rates, too. The potential volatility of repayments can mean that budgeting into the future could be more difficult; no one knows how interest rates may change over the course of a year or two.
Snapshot: Fixed vs. variable loans
Fixed interest rates or ‘fixed’ periods offer more stability. This is a great benefit if you're the kind of person who relies on consistency and predictability. But, of course, this stability comes at a cost. Normally these loans are less flexible, and charge a substantial fee for making early or additional repayments. It can also be very tough to ‘break’ the loan too.
What's the right choice for me?
If the option is available, the question of 'fixed versus variable loans' will come down to your preference – do you value flexibility or predictability?
If you're still not sure, take a comprehensive look at your budget. Consider:
- Will you want to make early repayments on your loan to reduce overall interest?
- Will you want to refinance in a few years once your credit history has improved?
If there is a high cost of breaking your loan under a fixed rate, then the flexibility of a variable loan will be attractive to you. It's possible that you could pay more in interest if rates go up, but you can avoid additional fees if you want to refinance or make early repayments.
What are some other options?
If you're looking at a new home loan, it may be possible to 'split' your loan – that is, have it half fixed and half variable. This way, you can get the best of both worlds; you'll reduce your exposure to increases in interest rates while avoid ‘missing out’ on future low-interest rates.
Your choice may also come down to what is available to you from your preferred financier.
A personal loan is an unsecured loan. This means that this could be used for anything you want – whether that’s a new car or renovations. The downside is that it may have a higher interest rate.
A personal loan could be a fixed loan or variable loan. So by choosing a personal loan, you may have more choice available to you. At the end of the day, your choice of loan should come down to your financial situation.
Not sure what's right for you? Let’s help.
Rapid Finance is the expert in finance – from low rate car loans to home loans with all the right features, we’re ready to match finance with your specific needs. Even if you have a less-than-perfect credit history, finance may still be possible.
For more information about finding a fixed or variable loan, contact a Rapid Finance specialist on 1300 467 274