The Benefits of a Variable Rate Loan

If you want to get a loan at a cheap rate, then you should look at the possibilities of applying for a variable rate loan. These loans have an APR rate that can vary depending on the base interest rate. This can either work in your favour or against you, depending on whether rates rise or fall. If you want to know more about the benefits of variable rate loans, then here are some tips for you.

What is a variable rate loan?

A variable rate loan is a type of loan that has a changing interest rate. Usually, the APR of the loan will track the base rate of interest, but obviously a few points above this. This means that should the interest rate fall, then the rate of the loan will likely fall. However, if the rates rise then so will the APR of your loan.

Interest rate risk

Of course, the problem with taking out a variable rate loan is that the interest rate can vary, which is a risk if the rates rise. If you are on a fixed income, then getting a variable rate loan could cause problems for you should your monthly payments increase due to an interest rates rise. Before getting a variable rate loan, be sure that you can keep up with repayments even if the rates rise.

Rates cap

Although variable rate loans carry some risk, there is usually a cap on the amount that the interest rate can change, but up and down. This means you will know the maximum or minimum you will pay should the rates change. Getting a variable rate loan that has a cap on will help you to budget and reduces some of the risk involved.

Variable rate is lower

At the moment, getting a variable rate loans looks like a good option, as it is likely that rates will continue to remain quite low. This means a five-year variable rate loan is likely to be cheaper than a similar 5 year fixed rate loan. Also, fixed rate loans generally have a higher interest rate because you have the knowledge that your rate will not change.

Other costs

As with any other loan, you need to consider other costs apart from the interest rate. Costs for late fees, administration fees and early payment penalties are all things you should consider. If you look at all of these aspects then you will find a better loan deal to suit your needs.

Variable or fixed?

In the current climate, a variable rate loan will normally be cheaper than a similar fixed rate loan. However, you need to make sure you can afford the repayments if the rates should increase. If you do this then you can take advantage of low interest rates and get a great deal on your variable rate loan.

Source by Peter Kenny

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