Most personal loan offers are for fixed interest rates, but variable-rate loans may also be available in some cases. It’s important to know the advantages and disadvantages of each before you sign on.
Fixed-rate loans have an interest rate that will not change over the course of your repayment term. This means that your monthly payments will be uniform and predictable. In low-rate environments, it can be especially advantageous to lock up a rate for the life of your loan, though you will not benefit if rates fall further unless you refinance. Refinancing may bring other expenses, and is not always available.
Variable-rate loans generally have a lower initial interest rate, so you could save money on your payments at the start of the loan. That initial rate is only locked in for a specified period, after which it is subject to vary according to market conditions.
These variations in rates could go in your favor or they could go against you. If interest rates are high and you think them likely to fall, a variable rate could act to your advantage. However, if rates are already low and seem more likely to rise than to fall, you may be better off locking in your rate.
While interest rate changes could go either way, one caution about variable-rate loans in general is that they introduce an element of uncertainty into your finances. Since you don’t know what your monthly payment will be, it will be tougher to plan your budget. Under extreme conditions, you might find yourself no longer available to afford a rising loan payment.