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Fixed or variable personal loans: differences explained

Planning to take out a personal loan? Then it’s important you understand the types of interest rates you’ll have to pay for your debts. We’ll help you do just that here. Scroll down to learn the difference between fixed and variable interest rates and figure out which lending option will be better for your particular needs.

Credit24: know what you pay upfront

Key difference between fixed and variable loan

The fundamental difference between fixed and variable loans lies in how frequently the interest rates change during the loan term. In the case of fixed loans, the interest rate stays the same throughout a set period or the entire duration of the loan.  And for variable loans, the interest rates fluctuate over time as they are subject to market conditions. While fixed loans are predictable, variable loans can be a bit of a roller-coaster.

For example, if you get a fixed loan at 5%, you will keep paying 5% interest for a pre-determined duration or until the entire loan is paid off.  In Australia, most fixed-rate periods last between 1 and 5 years.¹ 

However, if you take out a variable loan, your interest rates can go up or down depending on the terms of your loan as well as market conditions.

How does a fixed interest rate work? Are personal loans fixed or variable?

They can be both. Personal loans, like car loans, home repair loans or student loans, can be both variable and fixed, depending on your needs and agreement with the lender. With a fixed-rate personal loan, your interest rate remains constant.² This makes fixed loans predictable since your monthly repayment amount remains fixed. 

In case of variable personal loans, you get more flexibility as the interest rates are based on the market conditions. Favourable market conditions will ensure that you get variable loans at lower initial rates.  Unfavourable market conditions, however, can adversely affect your interest rate over time. This leads to varying monthly payments that can affect your overall financial planning and budgeting.³

Variable vs fixed loan: pros and cons

Variable rate loans

The interest rate of a variable loan is linked with the market interest rates, so if they go up, your payment will go up. If the market rates go down, your payments go down. So, whenever the Reserve Bank of Australia raises or lowers the official cash rate depending on the economic conditions, the variable interest rate on your loan will increase or decrease with it.⁴

Variable loans: pros and cons

Pros Cons
Typically has lower initial rates Payment uncertainty due to fluctuating rates
Flexibility for lower monthly payments when market rate drops Risk of higher interest costs if market rates rise
Potential for early repayment Limited predictability of monthly repayment amount
Offset account benefits Vulnerable to economic changes
Ability to hedge against inflation Lack of financial stability impacting household finances and budgeting

Fixed rate loans

Fixed-rate loans aren’t directly affected by financial market changes, so your interest rate and repayment amount stay the same. However, the other terms of your loan agreements with the lender, such as loan duration and associated fees, can impact the overall cost and payment structure. 

Fixed-term loans are typically provided for short durations and most lenders impose additional costs for providing loans at a fixed interest rate. Credit24 doesn’t impose any extra fees for early payments on fixed-term loans.

Fixed rate loans: pros and cons

Pros Cons
Payment stability with fixed interest rates Higher initial interest rate compared to variable loans
Predictable monthly payments Limited flexibility to refinance on lower rate
It makes setting future financial goals easier Early repayment can incur a penalty
Protection against economic uncertainties Lack of offset account benefits
Provides security for borrowers who are on fixed-income

Variable or fixed rate personal loan: which one should you choose?

Choosing between a fixed or variable personal loan depends on your preferences and financial situation. You can choose a fixed-rate personal loan if you are looking for certainty and stability in terms of repayments. This option also allows better planning and protects you from market fluctuations. 

On the other hand, you can opt for a variable loan if you want to benefit from the lower interest rates. If the market rates decrease, your payment will decrease too. The variable rate loans also have a lower initial rate compared to fixed-rate loans. This will offer immediate cost savings if you are also anticipating early repayments.

You should consider the following factors before making the final choice between fixed and variable interest rates: 

  • Interest rate spread
  • Term of loan
  • Interest rate forecast
  • Personal income forecast

Credit24 Loans: Get Fixed Loans With Flexibility of Variable Loans

Credit24 offers fixed loans with flexibility in loan amounts, duration of repayment and frequency of payments. You can choose any amount from $500 – $10,000 as your loan amount and decide your repayment duration (up to 36 months). No surprises or hidden charges as your repayment amount is fixed upfront. 

Here are a few more benefits of Credit24 fixed personal loans : 

  • For loans up to $2000, there’s no interest at all
  • For loans from $2001 to $10,000, a fixed rate based on your credit history and other factors like your salary.
  • No surprise, the payment schedule is shared upfront
  • Choose a term of up to 36 months, but you can pay earlier without any penalties
  • Check the calculator to get a rough estimate of how much you’d pay
  • Quick, easy and 100% online application available 24/7
  • If application is approved, payouts can be as quick as 60 seconds

Credit24: know what you pay upfront

Can I change from variable to fixed

Yes, you should be able to switch your variable-interest loans into fixed loans if you’ve taken out the loan with a lender that offers both options. Most lenders provide fixed interest rates for up to 5 years and you may have to pay extra cost for locking in a fixed rate. 

Make sure to check with your lender for specific details regarding the potential fees and the process for switching from variable to fixed.

Bottom line: Are fixed or variable loans better?

Both fixed loans and variable loans are great options depending on your needs and financial situation. Eventually, it is up to you to decide which loan suits you best based on your repayment preferences. Fixed-rate loans offer stability and predictability. This is beneficial for people who prefer consistent monthly repayments. Variable loans are better for those who want to take advantage of market fluctuations and find lower initial rates appealing. 

Credit24 fixed loans: plan with certainty

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