What if you were stuck between two roads? The first one is straight, unobstructed and with aligned posts along its path while the other is a bit wavy, with steep slopes and low depressions. Which path will you take? You might choose the first road considering the security and safety in getting to your destination. But you may also have the guts and try to travel the other road which seems to be a little risky but more adventurous.
Same situation is exactly true whenever you are stuck in deciding what interest term would land you to the best financial option you badly needed. Would it be fixed interest rate or variable interest rate? These two types of interest terms emit equal shades of advantages and disadvantages. How these two will work for your benefit actually depends on your financial considerations. But to at least guide you in making up your borrowing decision, you may consider the following insights:
As the term suggests, fixed interest rate works in a manner that can no longer be altered or changed once locked in a particular loan type. Fixed interest rate is generally higher than the variable interest rate. Its rate structure is solely dependent on the creditworthiness of the borrower at the time of loan application. Since it is fixed, it conforms to the idea that the monthly payment to pay off the debt will remain the same throughout the duration of the loan life regardless of any possible changes of interest in the market. This type of interest term is advantageous to the people who prefer to have an equal monthly repayment which they can customize depending on their personal cash flow. It could as well be valuable to those who follow a monetary budget paradigm. Others will find it beneficial since it can offer a more flexible repayment scheme on a longer term. Borrowers who expect that the interest rate applicable in the recent interest rate environment will increase, can surely dig into this type of interest term so as to lock in a lower interest that will secure them a lower amount of monthly repayment.
Variable Interest Rate Term
Unlike the fixed interest, variable interest is a bit lower and is subject to changes affected by the prevailing condition of interest in the market. In choosing this type of term, you must bear in mind the possible fluctuation of interest or the rise and fall in cycles of the rates that will surely affect the amount you will pay for your debt. You must factor in the possible rate swings on the interest rate environment. Its structure is based on the condition of quarterly changes in index and the fixed margin of the borrower. Others may find it helpful if they want to keep a loan over a short period of time only. This is because the applicability of this interest term will work wise in a shorter amortization period where changes in the interest rate in the market have a lower tendency. This could be an easy gain to those people who are confident that along the loan life of their debts, a lower interest rate in the market will become available.
Whichever of these two interest rate terms you’ll choose, it is important that you weigh in their shares of boon and bane. You must look into the longer term perspective and see which of these two options will give you flexibility in repaying your debts without compromising you in the long run of the process.