The best reason to choose a fixed-rate loan is to avoid unexpected changes to your interest rate. A fixed-rate loan will have the same interest rate throughout the life of the loan. Whereas, a variable-rate loan may see shifts in the interest rate.
If you need stability and want your monthly payments to remain predictable, then a fixed-rate loan is probably the best option for you. Many different kinds of loans offer fixed rates ranging from small personal loans all the way to mortgages and auto loans. The type of rate you get will depend on a number of factors.
Getting the best interest rate possible for your fixed-rate loan will depend on a few things. First, your credit score will play a large role. Having a score of 630 or above will make you more likely to be approved for loans. With a higher score obviously being better. Other factors that lenders consider are your overall credit history, your income, your current debts, and the state of your bank account.
These same factors will likely come into play for variable-rate loans as well. The only difference in a variable-rate loan is that the interest rate will fluctuate over the course of your repayment period. But what affects the interest rate for these types of loans? Your interest rate may go up or down based on something called a benchmark interest rate, or “prime rate.”
The benchmark interest rate is essentially an overall interest rate that banks use to lend to one another and to customers. It’s decided by an independent body and may change based on the financial markets.
Choosing between these two options can be tough. After all, you may save money at times using a variable interest rate, but there may also be times when the interest is higher than what your fixed rate would have been. If you know exactly how much you can afford in monthly payments, and you don’t want it to increase, then a fixed-rate loan is a better and safer option. But if you have a little bit of financial wiggle room, then you may want to consider a variable-rate loan.