Money Hack: Why you shouldn’t fix your personal loan rate
Are fixed rate personal loans all they're cracked up to be? Answer: no.
You're about to apply for a personal loan and you're hit with two choices: fixed or variable interest. Seems like a no-brainer, right? You don't want your repayments to change so you pick fixed. But are fixed rates really the best option?
The difference between fixed and variable
- The interest rate cannot change on a fixed rate loan, so you know exactly what your repayments are each month.
- You can generally repay your variable rate loan early or make additional repayments, but you usually can't with a fixed rate personal loan. If you are able to, you will usually be restricted as to how much extra you can pay or you will be charged a hefty penalty.
- Neither is more competitive. You can generally find rates between 8-16% p.a. on both fixed and variable rate personal loans.
Don't take out a fixed rate personal loan. People choosing fixed rate personal loans do so because they want their repayments to remain the same throughout their loan term. If you take out a variable rate personal loan, you run the risk of the rate increasing if the cash rate increases.
However, we recently looked into this and the cash rate has had little to no effect on variable rate unsecured personal loans. By opting for a variable rate, you'll:
- Find similarly competitive rates
- Be able to make extra repayments
- Be able to repay the loan early without penalty
- Know that a change of rate is very unlikely, and if it does change it shouldn't be more than 1%.
If you don't think you'll have the money to make extra repayments, just consider how much your financial circumstances will change over your loan term. It could be over five years or even more. Five years. So much could happen in that time. You could get a raise, change jobs, come into an inheritance, get a larger than usual tax return or win the lottery.
A variable rate personal loan gives you the flexibility to repay early and save money if you're able to but doesn't punish you if you don't.
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