The choice of financial products such as loans must be approached very carefully. Under this general name, you will find many types of loans with different conditions for their servicing and repayment. These details may seem insignificant, but they determine whether loans will be profitable or predatory. One of the factors that influence how much you have to repay the lender is the interest rate.
So, when choosing a loan, not only the value of interest rate is important but also whether it is fixed or variable.
Loan Life Cycle and Types of Interest Rates
Each loan has a closed cycle if it is repaid on time. If for some reason, the borrower refuses to repay it properly under the terms of the agreement with the lender, this cycle receives additional development. These extra stages may receive different forms depending on the lender’s actions. Overall, if you are looking for loans with low interest rates, their life cycle will consist of the following stages:
- Filing an application;
- Underwriting stage or creditor decision-making;
- Debt servicing;
- Full debt repayment.
If the interest rate remains the same throughout this life cycle, it is considered fixed. If during this cycle, it can change by the decision of the creditor on the grounds set out in the agreement, it will be variable.
Key Advantages and Disadvantages of Fixed and Variable Interest Rates
Fixed Interest Rate
- You will be able to calculate in advance the total amount that will have to be repaid to the lender. This allows you to easily compare financial products from different lenders and make the best choice.
- A fixed rate gives certainty for the future in relation to monthly payments and makes it easy to plan further financial expenses.
- You will be protected from interest rate increases and spoiling your long-term financial goals.
At the same time, you must understand that you will not be able to take advantage of favorable opportunities that may arise during debt service:
- If the bank’s interest rate for a similar financial product decreases, you will not be able to switch to more favorable terms.
- You will not be able to pay off the debt earlier to reduce the amount spent on servicing it. Violation of this rule entails certain fees.
Variable Interest Rate
If you think you can pay off the debt before the stated deadline, you should choose a loan with a variable interest rate. In this case, you can pay it off as soon as you have funds without any fees. If the bank’s interest rate decreases, this will have a positive effect on your payments. At the same time, you will not be protected from the lender raising the interest rate. This can disrupt your financial planning and delay the achievement of your long-term financial goals.
The advantages and disadvantages of fixed and variable interest rates are exactly the opposite. Therefore, you should carefully assess your personal financial risks and the situation in the country’s economy to understand which type of interest rate is more profitable for you.
