When it comes to making a big purchase, you’ll likely need loan. Whether it’s a mortgage, refinancing a mortgage, auto loan, or any other similar loan, understanding the differences between variable and fixed interest rate loans could save you money.
What Determines Interest Rates?
For each type of loan, there is a number of factors that influence the rate of the loan. However, in all cases, the biggest influencer will be the Federal Funds Rate (if in US). Simply put, if the Federal Funds Rate is cut, interest rates across all types of loans generally go down. When the Federal Funds Rate increases, so do interest rates for loans.
Variable Rate Loan
A loan where interest charged fluctuates or changes periodically over the duration of the loan.
Pros
- Lowest interest rate amongst all types of loans.
Cons
- Monthly payments may vary.
Fixed Rate Loan
A loan where interest charged remains the same over the life of the loan.
