A fixed-rate loan is a loan that has a fixed interest rate. Its interest rate doesn’t fluctuate so generally, it stays the same throughout the course of your loan. However, this doesn’t mean that it will never change.
A fixed interest rate is available in various types of loans such as:
- Student loans
- Mortgage loans
- Auto loans
- Home equity
Credit cards rarely have fixed interest rates.
How Does It Work?
As mentioned, a fixed rate loan will not change or fluctuate over the life of the loan, thus, you’ll know exactly how much you have to pay every month.
Advantages of a Fixed Rate Loan
A fixed rate loan will make budgeting so much easier. You know exactly how much your repayments will be. Hence, this will allow you to plan ahead and set your goals with more confidence.
Since fixed rate loans are fixed, you won’t get affected by any rate rises. For example, if interest rates rise above your fixed rate, you’ll be pleased to know that you’re still paying less than the variable rate.
Disadvantages of a Fixed Rate Loan
Fixed rate loan may seem like it’s the best thing, but it still has its disadvantages. For one, a fixed rate loan means you won’t benefit from a drop in interest rates. Another is, there are limits to this.
Most of the time, additional loan repayments are not permitted with a fixed rate loan. Also, a redraw facility may not be offered with this type of loan.
Should you change or pay off the loan within the fixed rate period, you may be subject to break fees.
If you’re thinking of selling your home or want to switch home loans, a fixed rate loan isn’t recommended.
Fixed or Variable Rate Loan?
You already know what a fixed rate loan is. But what is a variable rate loan? This is a type of loan where the interest rates fluctuate based on market changes. This means that your interest rate can rise or fall over the period of your loan.
When choosing between a fixed or a variable rate loan, there are some things that you should consider.
Sure, you can predict interest rates but this is very risky. To make it easier for you to decide, if you’re new to the market and you’re not comfortable in taking any risks, a fixed rate loan may be the right type of loan for you.
On the other hand, if you feel confident with interest rates, you can get a variable rate loan.
Keep in mind that switching a fixed loan rate to a variable loan rate can be a challenge because of the break costs that you have to pay. Hence, it’s vital that you take time to think over whether or not you should go for a fixed loan rate or not.
You can also ask for financial advice from lenders or brokers to help you come up with the best loan decision for your situation.