Fixed Vs. Variable Rate Loans

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Beyond Finance TeamPosted on Apr 26, 2018

Calculating your loan payments & Secured vs Unsecured Loans

When it comes to interest rates, they are either fixed or variable. Both have their advantages and disadvantages. Typically, installment loans use a fixed interest rate because the repayment amount and schedule are fixed. However, revolving loans more often than not are accompanied by a variable interest rate.

Let’s review an example of a fixed rate loan:

  • Installment loan amount: $25,000
  • Fixed interest rate: 6%
  • Length of loan: 5 years/60 months
  • Monthly payment: $483.32

The best part of the above example is that it is clearly stated. You can determine whether the monthly payment fits your budget. If the payment exceeds your budget, you can possibly adjust the equation by lowering the amount you borrow or lengthening the time of repayment. A loan payoff calculator is a great tool in determining your monthly payment.

If you were to use the same example above but changed the interest rate on a monthly basis, either increasing or decreasing it (a variable rate), you could end up paying less – or unfortunately, paying more. Depending on your comfort zone, one might be more appealing than the other. Those borrowers who are “risk averse” want to know that their payments are “fixed” and that regardless of what happens in the speculative interest rate market, the monthly payment won’t change for the life of their loan.

Examining the various options with your lender may help you to better visualize the loan program that is best for you. After all, being a responsible borrower will only benefit you for many years to come.

Lenders Like Secure Loans

Lending has an element of risk. So, whenever loans can be made and collateralized with an asset, lenders feel more secure. However, many loans are unsecured. For example, when you charge something on a credit card, there is an absence of collateral that a lender can put a lien on should you default. The better your debt to income ratio, the more favorable interest rate you’re likely to get.

Secured Versus Unsecured Loans

Whenever banks or lenders approve a loan, lending institutions like to have as much security as possible. They want to know that if a loan is not repaid they have a “Plan B” to fall back on. Collateral security is achieved by attaching a loan obligation to an asset so that in the event a loan defaults, the lending institution can seek repayment by liquidating the collateralized asset. Both installment loans and revolving loans can be secured should the lender make this a requirement.

An automobile loan and a home mortgage are perfect examples of secured loans. Failure to repay the auto loan means that Plan B takes effect in the form of a repossession.

Default on your mortgage payment, and a foreclosure on your home may ensue. Responsible borrowers use every means at their disposal to make certain that a default never occurs.

And the fact that lenders frequently charge higher interest rates on unsecured versus secure loans is no accident because their measure of risk is increased when there is no possibility of relying on Plan B.

For more information when it comes to personal loans, call 1-800-495-4069 today for a free, no obligation assessment with one of our experienced Consultants.