Fixed interest rates are stable, but variable rates may save you money.
Which may be right for you? Read this article to find out!
First, some housekeeping—what’s the difference between fixed and variable interest?
It’s exactly what it sounds like. A fixed interest rate remains the same throughout the life of the loan. Variable rates, however, are typically tied to another interest rate. If that rate changes, your rate changes.
So what does that mean for you?
In general, fixed interest rates are safer. Because they’re locked in, they won’t suddenly skyrocket if the economy changes. However, their rates are initially probably higher. You’re trading overall payment for stability.
Variable rates, then, can seem like a better deal. Historically, data shows that borrowers pay less on variable rate loans than fixed rate loans. But there are two important things to consider…
- Past performance never guarantees future returns. Just because variable rates saved people money in the past doesn’t mean they will in the future.
- Variable rates can have catastrophic outcomes. In 2008, families with adjustable rate mortgages suddenly found their interest rates skyrocketing. Many weren’t able to pay their bills and foreclosed, which contributed to the Great Recession.
The takeaway is that variable rates are not to be treated lightly. Consult with a licensed and qualified financial professional before you borrow money. Their knowledge of the current financial landscape can help you choose an interest rate type that works best for you and your goals.
This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies that may be available to you. Before taking out any loan or enacting a funding strategy, seek the advice of a licensed and qualified financial professional, accountant, and/or tax expert to discuss your options.