So you're looking to take out a loan and you see the variable rate and fixed rate options and wonder, which one should you get. Well, like many of the problems we've asked in the past, it really depends. Both have their benefits and downfalls. It's important to look at the terms and conditions of each loan you're considering, but it also take a little bit of predicting the future.
Variable Rate Loans
Variable rate loans are tied to an index like LIBOR and change based on the current interest rate. This technically is a good thing as it adjusts to expected inflation. What do I mean when I talk about interest rates, like LIBOR? These interest rates are the rates at which banks lend to each other, so generally banks will only lend money to consumers at rates above this amount. So a variable rate will change based on these factors, which changed based on many different things that's beyond the scope of this blog. Most variable rate loans will also tell you what their rate is based on and the maximum that it will ever become, no matter what.
Fixed Rate Loans
Fixed rate loans also base their rates off of indexes like LIBOR. However, these loans keep the same interest rate over the entire life of the loan. There's not much special about these. The interest rate you see is the interest rate you keep and your payments won't fluctuate unless you miss one. These can be beneficial if you enjoy knowing what your payment is each month and don't want to worry about interest rate fluctuations.
So Variable Rate or Fixed Rate Loan?
Variable rates normally give you the lower base rate, when compared to fixed rate loans. However, over time they can grow if interest rates grow after you take it out. If you take a fixed rate loan and interest rates rise, you're at least locked into your rate and this can be advantageous for you. However, things can also go the other way. Interest rates can fall over time and make fixed rate loans expensive. Variable rate loans have the advantage of their rate lowering when interest rates fall.
Currently, the interest rate is hovering right around 0% and many people expect that it can't go much lower than that without causing other issues. That doesn't mean that the rate won't go below 0%, as is the case in some European countries. In the past, people have typically saved more on interest with a variable rate loan. However, that does not mean that trends will continue that way.
A variable rate loan can also cause uncertainty, since your interest rate is constantly changing. If you're a fan of stability, this could make a fixed rate loan a bit more enticing. In the end, it will come down to your preferences and other factors, so it's impossible to say what is best for everyone.
Why not an income share agreement?
Why not just avoid interest altogether with an income share agreement (ISA)? Instead of pegging your payments to an interest rate, an ISA will tie your payments to your income. That's right, you only pay a portion of your income each month. This means if you ever lose your job, or earn under $25,000 a year for any reason, your payments will automatically pause and there won't be any interest building up either. Defynance currently allows you to refinance your student loans using this innovate method.
