Personal Loans, Fixed Rates & Variable Rates & What’s the Difference?

Personal loans come with either a fixed or variable rate option. Outlined below are the advantages of both fixed and variable rates as well as other things to consider.

If you’re thinking about taking out a personal loan, one of the key questions you’ll need to answer is whether you want a loan with a fixed rate or variable interest rate. Both types of loans have their advantages and disadvantages which should be considered.

How are the two different?

For a personal loan with a fixed interest rate, the interest rate is locked at settlement and the interest rate stays the same over the life of the loan.

For a variable interest rate personal loan, the interest rate can change, up or down, over the life of the loan.

Fixed rate personal loans

A fixed rate personal loan means certainty for the future. The interest if fixed for the term of the loan and the interest rate is locked in and you can plan, knowing your interest rate and minimum repayment amounts won’t change.

The key advantages

You can set repayment amounts for the life of the loan

Be protected against the possibility of future interest rate rises

Budget for the future and set financial goals.

Things to consider

Fixed rates loans usually have restrictions on making additional repayments. You won’t be able to make any additional repayments during the loan term without penalty or restricted to a fixed amount i.e. $1,000 in extra repayments a year without penalty. This means you will be penalised if you make additional repayments over the amount allowed.

You cannot redraw any additional repayments you’ve made.

Fees will apply if you want to pay out your loan early.

You won’t benefit from any interest rate decreases.

Variable rate personal loans

A variable rate personal loan offers more flexibility than a fixed rate personal loan. However, this flexibility comes with the chance that the interest rate may change over the life of the loan.

The key advantages

With a variable rate personal loan, you can make unlimited extra repayments, which can help you save on interest over the life of the loan.

If you’re a month ahead on your repayments, you can redraw from your additional repayments.

Things to consider

Your repayments may increase should the interest rate rise

It can be harder to budget for the future as you need to consider how future interest rate movements may affect your repayments.

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