Difference between Fixed and Variable Loans
Loans are essential for individuals and corporations in order to meet various financial requirements. They come in various forms and depend largely on your preferences. The biggest element to consider is the rate applied to the amount you have taken out, which can be variable or fixed.
Fixed loans or fixed interest rate loans are the most common type pursued by borrowers. As the name implies, the borrower will be charged a fixed amount throughout the course of that loan, giving him reasonable protection against market fluctuations. As for variable loans, the rate applied will fluctuate and be adjusted according the to the prevalent market conditions. It could further be monitored or traced by following an index, like the London Interbank Overnight Rate (LIBOR). Any rise or fall will affect the overall interest payments associated with the loan.
For this reasons, fixed interest rate is relatively safer when compared to variable. Despite both giving the lender a considerable advantage in terms the overall loan payments which will be greater than the loan itself, fixed loans allow the borrower to calculate the exact amount he or she has to pay when the loan term expires. In the other scenario, the borrower will be exposed to market changes but could take advantage if the interest rate declines. However, if the rate increases, the loan payments will become greater.
Despite being risky, greater flexibility is attached to the adjustable loan rates, where lenders are willing to offer the borrower different options on how the amount can be paid back. Sometimes, a ‘cap’ may be assigned to the loan in order to limit greater exposure from market variations. This is usually referred to as the ceiling and floor rate, which are the maximum and minimum rates that can be charged.
Fixed loans are preferred for first time homebuyers or those new in the market. Adjustable rates can be advantageous to those who have greater financial power to meet market changes.
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Fixed loan
It is a type of financing where the interest rate remains constant over the duration of the loan, thus giving the borrower a clear picture regarding the payments he or she will have to make over a certain period of time.
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Variable Loan
It is a financial agreement under which the interest rates and the amount of each payment will not remain constant throughout the life of the loan.
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. Any rise or fall will affect the overall interest payments associated with the loan.
For this reasons, fixed interest rate is relatively safer when compared to variable. Despite both giving the lender a considerable advantage in terms the overall loan payments which will be greater than the loan itself, fixed loans allow the borrower to calculate the exact amount he or she has to pay when the loan term expires. In the other scenario, the borrower will be exposed to market changes but could take advantage if the interest rate declines. However, if the rate increases, the loan payments will become greater.
Despite being risky, greater flexibility is attached to the adjustable loan rates, where lenders are willing to offer the borrower different options on how the amount can be paid back. Sometimes, a ‘cap’ may be assigned to the loan in order to limit greater exposure from market variations. This is usually referred to as the ceiling and floor rate, which are the maximum and minimum rates that can be charged.
Fixed loans are preferred for first time homebuyers or those new in the market. Adjustable rates can be advantageous to those who have greater financial power to meet market changes.Next%20stop%3A%20Pinterest "Pin It")
