While borrowing a loan or getting financial assistance from a lender or bank, every customer gets stuck in a hard situation of what to choose: fixed or variable rate of interest. It’s a very overwhelming task, especially for first-time loan borrowers. Both have their own benefits and disadvantages but having a better understanding of the two makes a person wise and aware of the issues and financial risks of money-related things. Whether you want to know about loans with a variety of debt consolidation options or just a secured loan, you should know every aspect like fixed interest rate and variable rate of interest.
Here, in this blog, you will know the basic difference between the two to make an informed decision before choosing a particular loan.
What is the interest Rate on a Loan?
Whether you are considering the best-ever debt consolidation options or choosing financial assistance from a genuine lender, you have to focus on knowing every aspect of interest rates. First, learn what is rate of loan interest is:
Interest rates are a set percentage of the loan or deposit for which you have charged and you need to pay it monthly during the loan tenure. It’s a very crucial indicator of the cost of the borrower or the rewards of your entire savings.
Fixed Rate of Interest
If you opt for a loan with a fixed rate of interest, then your interest rate will remain constant throughout the loan tenure and it is packed with many benefits like a fixed rate of interest, a better approach for long-term goals, security of interest rate, and easy management of financial aspects.
Deciding to take a fixed rate of interest will help you become a good economic manager of your personal and household chores.
Variable Rate of Interest
In a variable interest rate, your interest value changes due to market fluctuations, inflation in the economic world and so on. In variable rates of interest, you don’t know what amount you need to pay to your bank or lender next month. The rate of interest may vary every day, monthly or quarterly based on the market condition and situation of financial aspects in the particular region, country or in international ground. Variable interest rates have their own drawbacks and benefits which every personal or secure loan borrower should know very minutely.
Pros and Cons of Fixed and Variable Rate of Interest
Based on several factors like risk tolerance, loan tenure, market value, and fluctuations in the financial domain, a loan should be chosen. There are several types of pros and cons of fixed and variable rates of interest which you should know.
Pros of Fixed Interest Rates
Predictable Interest Payment: The monthly interest or debt payment will be fixed by your lender if you choose fixed-interest EMI. It won’t affect your pocket a lot because you will be aware of the interest you have to pay.
Easy Budget Management: As you know how much value of interest you need to pay to your lender or financial institution and thus it becomes very easy for you to manage your budget effortlessly.
Security of your Money: In a fixed interest rate, your money security is possible because you can easily allocate funds for your household expenses and other purchases by adding a set limit for the next month’s debts.
Cons of Fixed Interest Rates
If you want to know the cons of fixed interest rates, then you have to read this pointer very carefully:
Possible higher Rate: If your bank has fixed a particular rate, then you have to stick to the same and it won’t differ throughout the tenure. You will analyze sometimes that people are paying less among variable interest EMI and you are paying a higher rate.
Missed Chances of Rebate: Once you have chosen a fixed-interest loan, then you can’t change it throughout your tenure. In this way, you will regret the moment when you have selected this option.
Pros of Variable Interest
Lower interest rate: sometimes you are required to pay a very low rate of interest when the market value goes up and it will be very beneficial for managing your budget.
Better Experience of Market Conditions: Based on your market fluctuation or financial ups and downs, you will get better experience in dealing with several types of financial issues.
Cons of Variable Interest
Risk of Interest Hike: in variable rate of interest, you won’t know what will be the market condition in the future. You may face interest hike risk in which you are required to pay a very high value.
Difficulty in Managing your Budget: With variable interest rates, you don’t what your financial condition in the future due to market ups and downfalls, here you will face several challenges in managing your daily finances and money management.
Summary
There are two types of interest rates: fixed and variable. You should know both of them to tackle things easily. In fixed interest, your interest rates will be fixed throughout the loan tenure and it will fluctuate in variable interest rate.
