Fixed Rate Vs Variable Rate Loans

"Fixed Rate Vs Variable Rate Loans"

Financial emergencies cannot be predicted and certainly cannot be controlled, but what you can keep under control is the approach you can adopt on how you can repay your loan obligations. This is the reason why lending institutions offer numerous ways of repayments based on the interest rate that you can afford.

Two of the most common loans that most individuals avail themselves of are fixed loans and variable loans. It is important that you know the difference between the two to put you in a better position when deciding which one suits your current financial status best.

Fixed interest rate

When you avail yourself of a loan with a fixed interest rate, this means the interest rate doesn’t change or fluctuate during the lifespan of the loan. It remains the same and doesn’t change over time or during the entire period of the payday loan, allowing you, the borrower, to know how much you should pay when repayment is due.

Variable interest rate

Under a variable loan, the interest rate changes or varies depending on market conditions. This means when market interests change, so is the interest rate on the variable loan.

When you avail of a variable loan, the amount you pay for your repayments may vary. You will have no way of predicting how much you should pay on your next repayment due date, as the interest rate relies on market conditions.

Which one should you avail?

There is no easy yes or no answer when deciding between a fixed loan or a variable loan. When deciding which no credit check loan to avail, it will serve you well to know how interest rates on these respective loans affect how you pay your repayment dues.

It is a must to understand how interest rates work since they greatly affect how much you pay for your repayment obligations. It is also important to know if the loan you availed yourself of can change or not, as this sets the pace for how much your current income only allows.

With these factors in mind, it is important to know why interest rates change. Under a variable loan, for example, the interest rates depend on the Reserve Bank Australia’s cash rate. When there’s a fluctuation in the cash rate, you can also expect a change in the interest rate you pay.

The fluctuation in the Reserve Bank’s cash rate may be attributed to inflation. Simply put, when the economy is on the upswing, the cash rate increases as well. When the economy is not performing well, the cash rate will go down, too. The cash rate is being used by the Reserve Bank Australia as a means to regulate the economy.

Hence, the interest rate you pay under variable loan changes depending on cash rate performance. This means your repayments may increase or decrease. The question of keeping up with higher or lower repayments all depends on you.

It is also important to note that when you pay for a loan, the payments you make essentially goes to the interest rate. So, when deciding which loan to go for, it is important to keep in mind how much you can afford in terms of paying for the interest rate.

To help you decide better, here are the pros and cons of fixed loans and variable loans:

Fixed loans


  1. You can plan your budget better, as you already have an idea of how much your repayment will cost. This means you will also able to effectively manage and plan your finances.
  2. Even when market interest rates increase, you need not worry as this won’t affect the NZ loan you availed.


  1. Since the interest rate is fixed, you are not entitled to any interest rate discounts or reductions since you agreed on a fixed interest rate to be paid on the full life of the loan.
  2. When you are able to pay more and decide to make more repayments, there are restrictions or limitations to making extra repayments.
  3. You can get charged for another fee should you decide to pay off the full amount of your loan outside the agreed repayment schedule.

Variable loans


  1. You are allowed to make extra payments on top of your repayment due.
  2. You can save on interest rates when you decide to switch or avail of a new loan.
  3. You are entitled to unlimited redraws.


  1. Since interest rates vary, you will have a much difficult time planning your monthly budget.
  2. When you can’t predict the interest rate you should pay every month, it can cause stress, especially when your income would no longer allow for rate increases.

The interest rate to avail for home loans

Weighing in these pros and cons can help you immensely when thinking of getting a home loan. Most home loan customers avail themselves of a fixed rate home loan due to the following advantages:

  1. When you avail of a five-year home loan, for example, you can expect to pay the same interest rate for the entire five years. This means you will be able to plan your finances more efficiently.
  2. You don’t have to worry about fluctuating market interest rates, as this won’t affect your home loan in any way.
  3. You don’t have to deal with financial stress, as you already know how much to pay from Year 1 to Year 5. You will be faced with higher mortgage repayments as there is no increase in the interest rate that should be paid until the end of the loan.

If this arrangement works for you, it is probably a good idea to go for a fixed rate home loan. Fortunately, you can choose from a wide variety of banks and lending institutions that offer fixed rate home loans at the best rates.

Before taking that big step, take note of the following tips when making your decision:

  • Make a list of your needs and wants. Every customer has different priorities when looking for a home loan, and it is important to know what you want out of the loan you want to avail.
  • Compare different home loan companies. It is important to research and compare different fixed interest rates to see which company offers the best for your unique requirement.
  • Don’t hesitate to consult a professional. A mortgage broker, for example, can guide you on which home loan to avail that suits your needs, on top of helping you find the best interest rate for a home loan.
  • If you’re keen on finding the lowest interest rate for home loans, it is a must to compare lending companies to give you a better idea of what they can offer on the budget you want to provide. There are a number of online sites that you can visit to compare rates between lending companies.
  • Keep in mind that you don’t have to pay for the services of a mortgage broker, as more often than not, the lending institution will pay the fee for referring you to their services. However, do note that lenders often include this fee when calculating your loan proceeds. In short, there is no need to pay the mortgage broker a separate fee as this is included in the home loan you will avail and will be coursed through the lender.
  • Never hesitate to ask questions when working with a mortgage broker and make sure that everything is explained to you in a clear and precise way. You will be spending hard-earned money, so every little detail counts.

So, when you decide to avail yourself of a home loan or any kind of cash loan, it is best to weigh up all the benefits and disadvantages based on the interest rate being offered before sealing any deal. May it be a fixed loan or variable loan, your decision entirely depends on your current financial situation.

More importantly, when getting a home loan, decide based on whether or not you will stay in that home for a long period of time. When you intend to stay for the long haul, then a fixed interest rate home loan may be a good option to go for. If you’re planning on moving homes in the future, then a variable interest rate home loan could be the best choice for you.

Take all the time you need when making this big decision. Remember you’re going to spend a good amount of money on this particular loan, and a hurried decision is never a good idea.

About the Author

Lucy has over a decade of experience in finance. She is currently the content curator here at Perfect Payday.

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