There are many offerings from lenders and banks on different types of loans but ultimately they fall under one or two categories: Fixed rate or Variable rate. The difference between the two is how the interest rate and monthly repayments are calculated. One is a fixed amount (guess which one that is) while the other sees its interest fluctuate with the market. There are benefits for either but it does depend on your financial situation, as well as what kind of loan you are looking for.
At the beginning of the loan’s life, there will be an agreed-upon rate of interest and a monthly repayment that will not change. The benefit of this type of loan is that it is easy to budget around as your payments will not fluctuate with the market. There are some downsides to this model, however. If the market moves below the interest rate you are paying your payments will not fall to match it. Additionally, it is more difficult to make extra payments towards your loan with lenders having a cap on the amount that can be paid. Normally this would occur if you received some extra money or decided to re-invest your tax return, for example. There can also be penalties for paying off your loan early. This means that choosing a Fixed Rate loan is something you have to live with until the loan is naturally paid off.
In contrast, the Variable Rate can have its interest rate and monthly payment fluctuate as the market shifts. Sometimes this may be more than the market Fixed Rate and sometimes it can be lower. This can make budgeting month-to-month difficult, especially if you do not have a lot of wiggle in your finances. While the negatives of a Variable Rate loan do make the Fixed Rate more attractive long-term there are some benefits offered that the Fixed Rate does not have. The main benefit is the ability to make payments outside the normal monthly principal. Combining this with no penalties for paying the loan off early means you could be paying significantly less over the life of the loan with some smart budgeting and investments.
Depending on which loan you decide to take will change which of the two types of loan would work best for your situation. The amazing Finance Brokers here at Carwardines can analyse your financials and offer you the best advice on which type of loan would work for you. Call us if you have any questions or to book a consultation.
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