Personal loan options can come in fixed or variable interest rates. These loans can help you obtain the emergency cash you need quickly. Keep reading to learn the difference between a variable and fixed-rate loan.
What Are Personal Loans?
Suppose you need money quickly to cover an unforeseen emergency. In that case, you may consider applying for a personal loan online or at a local financial center. Personal loans are installment loans that provide a lump sum that borrowers repay through monthly payments. These loans are extremely common; as of the fourth quarter (Q4) of 2022, over 22.5 million consumers have an unsecured personal loan.1
Personal loans are convenient because borrowers can customize loan terms to suit their financial situation. The loan amounts range greatly. You can apply to get a $300 loan or as much as $5,000 to move out. The amount you qualify to receive through a personal loan depends on the lender’s maximum loan amount, your credit score, and your income.
Personal loan borrowers can get months or years to repay the borrowed amount. The longer your repayment term is, the smaller your monthly payments will be. However, you may end up paying more interest fees with an extended repayment length. If you want payment flexibility, look for a lender that does not charge prepayment penalty fees. A prepayment penalty fee is a financial charge for paying your loan earlier than the agreed-upon date. Some lenders charge prepayment penalties to compensate for the monetary loss of additional interest fees.
Many people still qualify for personal loans despite a bad credit score. While your credit does affect your loan terms, you may still get approval for fast financial relief. The most critical factor for qualification is your ability to make monthly payments on time.
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.
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.
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.
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.
- Personal loan stats | Forbes
- Difference between fixed- and variable-rate auto financing?│Consumer Financial Protection Bureau