Key Takeaways
- Personal loans can have fixed or variable interest rates, each affecting your monthly payments differently.
- Variable-rate loans may start with lower payments but can increase unexpectedly, adding financial risk.
- Fixed-rate loans offer predictable payments, making budgeting easier and reducing surprises.
- Improving your credit score and setting up automatic payments can help you secure better loan terms and save money.
Yes, almost all personal loans are fixed-rate, meaning your monthly payment stays the same over the life of the loan. Some banks and online lenders also offer variable-rate loans. Fixed-rate makes budgeting easier because you always know what to expect as opposed to variable-rate personal loans, so there would be no surprises from changing rates.
If you’re thinking about a personal loan, chances are you need funds fast, whether it’s for an unexpected expense, debt consolidation, or a big purchase. A fixed-rate loan gives you peace of mind with steady payments, so you can focus on what matters without worrying about fluctuating costs.
What Are Personal Loans?
Personal loans are installment loans that provide a lump sum that borrowers repay through monthly payments. As of the fourth quarter (Q4) of 2022, over 22.5 million consumers have an unsecured personal loan.¹
The loan amounts for personal loans can range greatly. The amount you qualify to receive depends on factors like the lender’s maximum loan amount, your credit score, and your income. Many people still qualify for personal loans despite a bad credit score if they have sufficient income.
Variable Interest Rates vs. Fixed Interest Rates
Many banks offer both a fixed interest rate and a variable interest rate, which allows borrowers to decide between the two options. The best interest rate option for you depends on your repayment preferences and your existing budget.
Variable Interest Rate
A variable interest rate is also known as an adjustable or floating interest rate. Variable rates directly affect your monthly loan amount. Variable-rate loans fluctuate according to a benchmark interest rate that changes with the financial market. The interest for variable rate personal loans can change monthly, quarterly, or annually.
It’s almost impossible to predict what your monthly loan payment will end up being with a variable-rate loan. Many financial institutions promote variable interest rates as a low-cost lending option, but that may not be true. If the index rate decreases, you can end up with a low monthly payment amount. But the rate can also increase exponentially, and there is a risk that you won’t be able to afford your monthly payment.
Pros and Cons of Variable Interest Rates
These are the pros and cons of variable interest rates:
| Pros | Cons |
| Potential for lower initial payments. | Payments can rise unexpectedly with market rate increases. |
| It may be more accessible for borrowers with lower credit scores. | Harder to budget due to fluctuating monthly amounts. |
| It could save money if interest rates decrease over time. | Risk of financial strain if rates spike significantly. |
Fixed Interest Rate
Fixed rate loans provide borrowers with reliable monthly payment amounts. You don’t have to worry about affordability because your monthly payment amount remains the same for the life of the loan. Knowing how much you have to pay each month can make it easier to plan payments and stick to a budget plan.
Pros and Cons of Fixed Interest Rates
These are some pros and cons you can expect from fixed interest rates:
| Pros | Cons |
| Predictable monthly payments simplify budgeting. | Initial rates may be higher than variable-rate loans. |
| No surprises, the rate stays the same for the entire loan term. | Less flexibility if market rates drop; you’re locked into your rate. |
| Provides financial stability and peace of mind. | May have stricter qualification requirements for the best rates. |
What To Consider Before Getting Variable Rate Loans From the Bank
Before you decide between a fixed interest rate and a variable interest rate, consider your preferred level of risk. Obtaining a loan can help you get fast emergency cash to get back on your feet. But if you cannot meet the repayment obligations of your loan agreement, you can end up struggling to get out of debt with no money and bad credit.
Variable interest rates can help borrowers obtain monthly payments that are lower than a fixed-rate loan. However, you also run the risk of getting a high monthly price that you cannot afford to pay. Suppose your variable rate loan payment remains low for several months. Due to this pattern, you spend more than you usually do and end up with just enough money in your checking account to cover this month’s loan payment. Then you discover that the market rate has increased, and now you cannot afford your monthly loan payment!
When your monthly payment is too high, you may end up with a late or missed payment. Late payments will incur a late fee, which can be pricey. The cost of a late fee can increase significantly if you have multiple late payments.
In addition, late loan payments can have an adverse effect on your credit score. If your credit score is already low, you may lose valuable points. Late payments will stay on your credit report for up to seven years from the missed payment date.
Lenders are cautious about working with borrowers who don’t have an excellent payment history. You can end up getting subpar loan terms, high insurance premiums, and fewer housing options due to low credit.
Consider how much money you have left after all your monthly expenses are paid. Suppose you can afford to gamble with rising interest rates. In that case, a variable interest rate may not be a bad idea. If your credit is low, you may be able to get a better deal with a variable interest rate—but this is not guaranteed. A fixed-rate personal loan is the best option if you would rather know exactly how much you need to pay each month.
How Your Credit Score Affects Personal Loan Interest Rates
Fixed-rate loans provide financial stability to borrowers because the monthly payment amount remains the same for the life of the loan. However, the fixed rate you can obtain depends largely on your credit history.
Credit scores are split into five categories based on numerical range. The category you fit in directly affects how high your personal loan interest rates will be.
- Poor — 300-579
- Fair — 580-669
- Good — 670-739
- Very Good — 740-799
- Excellent — 800-850
Most financial institutions offer affordable rates to borrowers with a “good” score between 670 to 739 points. If your score is lower than 670, you may have to contend with paying more interest fees since lenders use higher rates to mitigate risk.
A higher credit score can help you obtain the lowest interest rates to save money. The lower your interest rate, the lower your monthly payment amount ends up being. Lenders offer the best interest rates to borrowers with a proven track record of on-time payments and financially wise decisions.
If you have less-than-perfect credit, know you can still get bad credit loans online! Many lenders offer affordable options for borrowers with bad credit scores. If you need money for bills or unexpected expenses, you can still manage to get a worthwhile personal loan offer!
Ways To Save Interest on Your Loans
Interest is the cost of borrowing money from a financial institution. Still, you can find ways to reduce the interest fees you pay! These financial saving tips work whether you get a fixed or variable-rate personal loan from the bank.
Set Up Automatic Payments
Automatic payments are an incredibly convenient payment option for borrowers. You don’t have to remember to pay your personal loan on time because payments are withdrawn automatically from your bank account. Some financial institutions offer discounts to borrowers who sign up for automatic payments. Ask your lender about money-saving options today!
Improve Your Credit Score
Improving your credit score can help you get a lower interest rate! If you actively work on boosting your low credit score, you can talk to your lender about refinancing. Refinancing a loan means revising the existing loan agreement terms. You may be able to get a lower interest rate by refinancing the personal loan once your credit is higher. Lower interest rates mean you can pay less out of pocket.
Make More Payments
Many lenders allow borrowers to make multiple loan payments each month. If you have additional money left over once you pay your monthly bills, you can use excess cash to pay down your personal loan. Making more payments can shorten the repayment period and decrease the interest fees you pay. However, first, make sure your lender does not charge prepayment penalty fees. Paying off your loan early may incur a charge with specific lenders.
FAQ
Can I switch from a variable rate to a fixed loan rate?
Yes. Some lenders allow borrowers to switch from a variable rate on their loan to a fixed one. However, switching the type of interest rate you have can involve fees or administrative costs. Changing rates is a complicated process that may require new financial contracts, which is why most lenders do not allow switches between a fixed-rate loan to a variable-rate loan. Before signing a loan agreement, carefully consider which type of interest rate is best for your financial situation.
Do variable-rate personal loans have the potential for lower interest rates?
Yes, a variable rate personal loan can result in lower rates due to market conditions. If the market is down, your variable rate can decrease, resulting in lower monthly payments. However, rising rates are also possible, and will result in higher monthly payments that may be challenging to pay for some borrowers. Before opting for variable rates, consider if you can afford to pay a higher payment amount if rates rise.
Which is better: fixed or variable rate?
The best type of rate depends on your finances and your risk tolerance. If you have a strict budget, a fixed interest rate may be a better choice since it provides you with stable, predictable payments. But if your finances are secure, you can afford to risk variable rates that rise or drop based on the market. Ultimately, the choice is yours, so it’s essential to weigh your options.
Do variable loan rates ever go down?
Yes, variable interest rates can decrease if the market goes down. If economic growth is down, the Federal Reserve may lower interest rates to stimulate the economy. If this occurs, then your monthly payments can drop, saving you a lot of money. But if the market unexpectedly improves, you will have to pay higher monthly payments.
The Bottom Line With CreditNinja
Personal loans are a great financial option for people who need money quickly. A personal loan from the bank can have a fixed or variable interest rate. The best interest rate option for you depends on your credit score and your finances.
Variable-rate loans can offer borrowers a fluctuating rate that can result in low monthly payments. However, the risk is that you may end up with a high amount you cannot afford to pay. Fixed-rate loans stay the same, so you always pay the same monthly amount.
At CreditNinja, we urge you to weigh your options carefully and consider your existing budget. Taking out a variable-rate loan may mean you have to reduce your monthly spending significantly to accommodate loan payments. On the other hand, you can set aside a specific amount each month to cover your fixed-rate loan.
There is no clear answer as to which interest rate option is better since everyone’s financial situation is different. Just ensure you take time to compare loan offers and speak to different lenders.
References:
- Personal loan stats | Forbes
- Difference between fixed- and variable-rate auto financing? │ CFPB
