The type of interest rate on your loan can matter as much as the number itself. Fixed and variable rates behave very differently over time, and the right choice depends on your finances and your tolerance for uncertainty.
Fixed Interest Rates
A fixed rate stays the same for the length of the loan, or for a defined initial period. Your payments are predictable, which makes budgeting easier. The trade-off is that fixed rates may start higher than variable ones, and you will not benefit if market rates fall unless you refinance.
Variable Interest Rates
A variable rate, sometimes called a floating or adjustable rate, is linked to a benchmark and can rise or fall. It may begin lower than a fixed rate, but your payment or the loan term can change when the benchmark moves.
Which Might Suit You?
- Fixed may suit you if you have a tight budget, prefer certainty, or expect rates to rise.
- Variable may suit you if you can absorb payment increases, plan to repay quickly, or expect rates to fall.
Questions to Ask the Lender
- What benchmark does the variable rate follow?
- How often can the rate change?
- Is there a cap on how high the rate can go?
- What happens to my payment if rates rise?
Stress-Test Your Budget
If you are considering a variable rate, calculate what your payments would be if the rate increased by a few percentage points. If that figure would be unaffordable, a fixed rate is likely the safer path.
This article is for general information only and is not financial advice.
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