Buying a car or house is no longer a big issue due to the availability of so many financing options. By paying a small amount as down payment, you can book a home or walk out of a showroom with your dream car. However, it pays to know the difference between fixed interest and variable interest loans. While most of the people opt for a fixed interest rate, you may want to familiarize yourself with variable interest rate loans.
What is a variable interest rate loan?
A loan with a variable rate of interest is a loan where the interest rate charged on your outstanding balance varies with changes in the market’s rate of interest. As a result, your installment payments will vary as well. While you may not be able to predict your upcoming installment payments, you can harness certain benefits that stem from a variable interest rate.
Benefits of a variable interest rate loan
Flexibility is the biggest asset to a variable rate. There is no need to worry about penalties if you wish to increase the amount of your monthly installment payment. Since your installment payment changes every now and then with the changes in the market rate, you are not charged with any sort of fines.
Ability to clear the loan faster is another perk associated with variable rates. Such an option is not available in a fixed rate deal. You are generally stuck with a given number of monthly installments for a specified amount of time. If you increase your monthly installment amount, you may be charged with fines.
In variable rates, you can pay off the loan faster without entailing any sort of additional fee. This can be really handy to pay off loans and mortgages that can become pressing over time. With a better financial standing, you can do away with any vehicle or home loan without worrying about additional fees.
Another benefit of variable rates is you get to tap the benefit of market rates. The lower the market rate, the lower the rate on your loan will be. In case you keep pace with changing market situations, you are sure to reap the varied benefits of a variable rate deal.
Shortcomings of variable interest rate loans
Variable rates do not offer stability or predictability; you are at the mercy of changing market rates. While your rate may go down, it could also go up. Rate changes are difficult to predict. You could be putting yourself in a financially vulnerable situation by opting for a variable rate.
Although fixed interest loans are a preferred choice for many folks when getting a car or home loan, variable interest loans can be beneficial in many cases. Just compare the perks of taking a home or vehicle loan with a variable rate of interest with your requirements and financial position. With the right information and knowledge, you should be able to make the right decision when choosing between a variable interest rate or fixed interest rate loan.