When you are choosing a loan, you will notice that some loans have a fixed interest rate and some have a variable rate. It can be rather confusing trying to work out which will be the best for you to take out. It is worth understanding the difference so that you can get a better idea of which will suit you. Some people choose to use a financial advisor to explain it to them and help them to make the right decision, especially if they suffer from poor or bad credit. However, if you cannot afford one then you might be doing this yourself. Finding out more about the different loan types us a good place to start.
With a fixed rate loan you will pay the same amount of interest every month. This means that if the base rate changes you will not have to pay a different amount. This can protect you against rate rises and will mean that there is no uncertainty as to how much you will need to repay each month. People who feel they will just about manage to cover their repayments will enjoy the security that this loan provides as they will know that their payments cannot go up.
However, you may find that the fixed rate will be higher than a variable rate. This means that you could end up paying more if you choose a fixed rate. If the base rate drops, you will not be able to take advantage of it if you have a fixed rate. You may also be tied into the loan so that you cannot switch to a lender which can provide you with a better rate. This can mean that it will be expensive for you, but it will depend on what the base rates do during the course of the loan.
A variable rate can be changed by the lender at any time. They will often put the rate up when the base rate increases, but they may not reduce it if the base rate goes down. There is therefore uncertainty attached with going with a variable rate and this is not something that everyone is prepared for. They may worry about the prospect of their rates going up and so may be more prepared to go with a fixed rate. However, there may be others that would prefer the flexibility of being able to switch lenders and for their rate to potentially fall when the base rate falls. They may be careful in choosing a lender which has no or a very small fee for moving to a new lender and will feel secure that if the rates go too high, they will just be able to switch to someone who is cheaper.
How to Choose
It is important to think about your own personal situation when considering which of these will suit you the best. There are different reasons for choosing different options and you need to think about which will suit you the best. Try not to just focus on your current financial situation though. Although it is very important that you are able to manage the repayments now, you must also think about how long the repayment period is and how you will manage for the whole of that period, not just in the next few months. Consider whether there are likely to be any changes in your financial situation and how that might impact your decision. It is not easy to predict the future, whether you are trying to think about what might happen to you or what might happen to interest rates. However, you might be able to contemplate a few scenarios and think about how you would cope in those. Because it is really important to make sure that you repay the loan on time, it is key to make sure that you are confident you will be able to do this. Not borrowing more than you need is a good way to start by protecting yourself against the costs of borrowing too much. It is also important to check how much the repayments will be and whether you will be able to afford these. If you go for a variable rate, they may go up and so you need to be confident that not only can you afford them now, but if they go up. Consider how much they might go up and whether this amount will still be affordable for you.
It is worth remembering that while you are choosing a loan type you will also need to think about which lender you need to go with. They will vary a lot in what they offer and so you may prefer what one offers in their fixed rate but what another offers in their variable rate. Try to keep open minded, do lots of research and pick what seems to be the best for you.