Have you wondered what type of loan rate is right for you, fixed or variable?
By simple definition a fixed interest rate loan is a loan where the interest rate doesn't fluctuate during the fixed rate period of the loan. A floating interest rate, also known as a variable or adjustable rate, refers to any type of loan that does not have a fixed rate of interest over its life. Floating interest rates typically change based on a reference rate (The most common is the Prime Rate).
With a fixed rate you are “locked” in and the rate will stay the same for the life of the loan. When the rate is married to the term and dollar amount of the loan you’ll know the payment amount for each month of the loan’s life. Simple, easy, no stress.
With a variable rate you will typically have a “Base Rate” plus a margin (1.00%, 2.00%, etc.) over the base rate. Each time the base rate moves up or down your loan rate will follow accordingly. If the base rate goes up your interest expense will increase. The payment amount may stay the same, but your overall cost of borrowing becomes greater. In contrast if the base rate goes down the cost of borrowing also goes down.
Sometimes there is no option on a fixed or variable rate. It may be the loan product you choose, for example a Credit Card or a Personal Loan, may come with only a variable rate. Other times you may feel that rates will be trending downward over the term of your desired loan and then, as above, your overall borrowing cost will be less. This can prove a bit of a gamble if your prognostications prove to be in error.
