When it comes to loans, they are not all created equally…and that’s a good thing! There are a variety of loans, some of which are fixed rate and others are variable rate. This blog will explain the differences between a fixed rate and variable rate loan, and share examples to help you make a wise borrowing decision that best fits your unique financial situation.
Understanding Fixed Rate and Variable Rate Loans
Since interest rates are a crucial component of loans and often help to determine the best loan product to use, it’s important to know more about how a fixed rate versus a variable rate work so you can choose the best borrowing solution for your financial needs.
What Is a Fixed Rate Loan?
A fixed rate loan has an interest rate and monthly payment that remains the same for the entire term of the loan, no matter how the market interest rates fluctuate.
What Is a Variable Rate Loan?
A variable rate loan has an interest rate that changes according to market conditions. Changes to rates are based on a benchmark index that reflects conditions in the lending industry. This also means that your loan payment will either increase or decrease according to the current market.
Examples of Fixed and Variable Rate Loans
Both fixed rate and variable rate loans offer unique benefits, and in order to make smart money moves, it's important to understand which is best for your financial needs. Here are some examples of different fixed rate loans and variable rate loans to compare.
Fixed Rate Loan Examples
Variable Rate Loan Examples
When to Use Fixed vs. Variable Rate Loans
Since not everyone is in the same financial situation, having the option to choose between a fixed rate loan and a variable rate loan is a good thing for borrowers. Here are some examples of when to use a fixed rate loan or a variable rate loan and some of the benefits of each.
Example of When to Choose a Fixed Rate Loan
Home Purchases: A fixed rate home loan offers a consistent payment throughout the loan term. This can be a great choice during a rising rate environment because the rate you receive when your loan is finalized will remain the same regardless of the changes in market conditions.
Debt Consolidation: A cash-out refinance is a Mortgage refinance option in which you are taking out a new home loan for more than what you currently owe on your home. The new loan is used to pay off your existing home loan balance and other debts. This combines multiple debts into one simple payment making it easier to manage monthly expenses, can save you money on interest and may help improve your credit.
Emergencies: A Home Equity Loan allows you to borrow exactly what you need and receive a lump sum for a designated term without the worry of varying payments. This is a great option for those who are in need of a set dollar amount to fund a home repair, project or other big purchase.
Examples of When to Choose a Variable Rate Loan
Home Purchases: A variable rate mortgage also know known as an Adjustable Rate Mortgage (ARM), offers the flexibility of a lower initial rate and monthly payment. This can be a great choice when interest rates are declining, because the loan payment will decrease as well.
Debt Consolidation: Transferring high rate credit cards to a lower rate option can reduce your monthly payment and save you money on interest. Peach State’s Visa Credit Card offers fee-free balance transfers, no annual fees, and more!
Emergencies: A Home Equity Line of Credit (HELOC) offers the flexibility of quick access to funds to pay for the things you need. With access to a line of credit of up to $150k and no prepayment penalty, funds can be drawn on and used whenever you need or kept available for later use.
The Best Borrowing Option for Your Needs are at Peach State
Peach State has a variety of financial loan products – both fixed and variable rate options to fit your unique needs. Our dedicated team of experienced lenders are here to help you choose the best loan and financial strategy to achieve your goals. Contact our team today!
We're also proud to offer a free member Resource Center with helpful blogs, eBooks, guides, calculators, and financial literacy content to assist our borrowers’ diverse, individual needs. Our Resource Center offers a wide range of financial topics on borrowing, saving and planning for your future.
1 Your Annual Percentage Rate (APR) will vary based on your final loan amount and finance charges. Rates apply to Owner-Occupied property with a maximum loan to value of 80%. 10/10 ARM rates adjust every 10 years through loan maturity based on the Index. The Index is the weekly average yield on the United States Treasury securities adjusted to a constant maturity of one year, as made available by the Board of Governors of the Federal Reserve System. The new rate will be calculated by adding a margin of 2.75% to the Current Index. The maximum the rate can increase each 10 year adjustment is 2% with a maximum lifetime rate of 6.95%.
