Introduction
Fixed loan is a type of lending option whereby the interest that is charged on the loan is kept at a constant rate and all the payments that will be made by the debtor throughout the life of the loan will also be constant. The only charges that are subject to change in a loan fixed arrangement are the ancillary costs, which include insurance fees and property taxes.
History
The Difference between Fixed Rate and Variable Rate Loans
The main difference between the two loans is the fluctuation in the interest rates and the flexibility of the payment options. Loan fixed will stipulate a set rate of payments for a predetermined period, while variable rate loans will have an adjustable rate of payments for an adjustable period of time.
Features
Benefits of fixed rate loans
Regardless of the financial climate a loan fixed will remain constant. If the economy is in a dismal state, it will not affect your loan payment amount.
Drawbacks of Fixed Rate Loans
Lenders will often place restrictions on extra payments. If your lender will allow you to make the extra payments on your fixed loan, they will often limit the number of extra payments.
Advantage of Variable Rate Loans
Since this type of loan repayment is dependent on inflation and economic indexes, the amount of repayments will vary with the status of the economy, thus if the economy is doing well the interest and the loan repayment amount will tend to be low. They will also borrowers to make extra payments on their loan. If the debtor is able they can repay the loan in fewer instalments and reduce the duration that the loan has to be repaid. This will in turn reduce the overall charges from the lender. However, if the economy is undergoing some changes which may lead lenders to raise interest rates, it may cost a lot more in the long run than a loan fixed.
Tips and comments
Fixed Rate Loan Tips
If you plan to borrow funds at a fixed rate for a mortgage, make sure that you intend on living in that house for a long period of time. This is because lenders will take into account whether you intend to occupy the house or not, while computing your fixed rate. Therefore, staying in your house during the mortgage period will help to reduce the cost of borrowing.
Assess the status of the economy and search for the lowest interest rate in the market. Since the interest rate will remain the same throughout the life of fixed loan, if the economy was to improve, your loan will not be affected by fluctuating interest rates.
Be punctual with your repayments. With a fixed rate loan repayment scheme, you are informed beforehand about the loan repayment amount of each instalment. This will give you time to arrange your budget and avoid late fees.
Applying for a loan fixed is a great way to manage the cost of debt, as compared to variable interest rate loans. Make sure to chart out any additional expenses, such as insurance fees and property taxes, to stay on top of your loan payments.
