Fixed Rate Vs Variable Rate Loans
The two basic types of loan options are fixed loans and variable rate loans. The differences between fixed loans and variable rate loans lie in the fluctuation of the interest rates and the flexibility of the payment options. Fixed loans, as the name implies, are the types of fixed loans that involve a determinate amount of payment rates at a predetermined period of time. Variable rate loans, on the other hand, are the types of loans that involve an adjustable amount of payment rates at an adjustable period of time.
Advantages of Fixed Rate Loans
In fixed loans, the amount that the debtor needs to pay the creditor stays the same for the duration of the fixed loans. A fixed rate also means that the fixed loans is not subject to adapt to different financial fluctuations. Whether the economy is doing well or not, the amount of money that the debtor needs to pay the creditor is still the same.
The only drawback to fixed loans is the restriction on extra repayments. Extra repayments are not generally allowed in fixed rate loans and if they are, the number of extra repayments are restricted. This just means that unless he wants a repayment penalty, the debtor cannot pay off his debt as early as he wishes.
Advantages of Variable Rate Loans
Unlike fixed loans, variable rate loans are dependent on inflation and economic indexes. The amount of regular payments rely on the current status of the economy. If the economy is doing well, the interest rates are more likely to fall but if the economy is doing poorly, the interest rates will increase.
An advantage of variable rate loans over fixed rate loans is the option of extra repayments in order to shorten the life and minimize the overall cost of the loan.
Recommended Home Loans & Mortgages
