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You are here: Home / Words of Wisdom / Understanding The Pros & Cons Of Fixed Interest Rate Loans

Understanding The Pros & Cons Of Fixed Interest Rate Loans

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When applying for any loan, you will often choose between ones with fixed or variable interest rates. What’s the difference? Well, a variable interest rate can change as time goes by. It might be low one year, and then rise up higher over the next few months, before dropping down lower than ever before.

On the other hand, a fixed interest rate stays the same no matter what. We are going to focus on this type of interest rate today. Specifically, we will look at the pros and cons of loans that come with fixed interest rates.

interest

Benefits of Fixed Interest Rates

Immediately, there is one aspect of fixed interest rates that is beneficial when applying for a loan. You know exactly how much interest you will be paying throughout the loan. No matter what happens, if there is a market crash or whatever, the interest will stay the same. As such, you can easily calculate how much the loan will cost depending on how long it takes to pay. All you have to do is use this simple loan calculator on bankrate.com, and you will see how much it costs you.

Having a fixed rate makes your loan a lot more predictable, which is a huge benefit to lots of people. It mentions on debtconsolidation.loans that a fixed interest rate provides more financial stability. There is no unpredictability with the loan, you know what you are getting yourself into, and there is no guesswork involved. It means you can patiently make repayments and remain stable.

Negatives of Fixed Interest Rates

Some people think that fixed interest rate loans are the best way to go. Why would you apply for a loan where the rate can increase? Here is the thing; you forget that a variable rate can also decrease. As such, you could pay less for a substantial period if the rate drops. With a fixed rate, you’ll never have the chance to pay less so you may miss out if the markets change and interest rates drop.

Another negative is that the starting rate of variable interest rates can sometimes be lower than the fixed interest rate. Again, this means you could be paying more money from the beginning. Even if the rate is lower for a month or two, that could equate to decent savings. Furthermore, it can be harder to apply for fixed interest rates, as lenders would rather have you on the variable ones.

In conclusion, fixed interest rate loans come with cons as well as pros. If you are looking for financial stability and do not want to constantly worry about your loan, then a fixed interest rate is great. There is no element of unpredictability, you never live in fear that your interest rate will skyrocket. In this sense, it is a great option for long-term loans.

However, if you want a short-term loan, then variable rates might be better. You could get a lower starting rate and can pay the loan back before the rate has a chance to rise.

Hopefully, this piece has given you all the info you need about fixed interest rate loans and when they might be suitable for you.

Filed Under: Words of Wisdom

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