Financing with the help of a loan today gives many consumers the opportunity to make larger purchases or repairs that exceed the current budget. In principle, the borrower has the choice between a loan with a variable interest rate and a loan with a fixed interest rate over the entire term.
Where is the difference between a fixed rate loan and a variable rate loan?
The main difference between the two forms of financing lies in the fixing of the interest rate. While a fixed interest rate can not change over the life of the loan, variable interest rates allow for both upward and downward interest rate changes.
Usually also loan agreements with a variable interest rate have terms in which the amount of the interest is fixed.
For example, if a loan with a term of 20 years is completed, it is quite common to adjust the interest rate in a 3, 5 or 10-year rhythm. In the interim periods, interest rates are frozen until the next adjustment. Fixed-interest loans have prevailed especially in installment loans.
Here, the offer is much higher than the offer of variable rate loans. A typical example of loans with a variable interest rate, for example, disposition loans.
What advantages does the fixed interest rate offer the borrower?
The main advantage of a fixed interest rate over the entire credit period for the consumer is the exact calculability of the costs incurred. A precisely defined repayment plan provides information about when which sum is due and when the entire loan amount has been repaid.
Fluctuations are excluded. Both the total and monthly fixed rate loan exposure are precisely tailored to the circumstances of the borrower.
A variable interest rate is always a speculation about future interest rates. Especially with larger sums, an unfavorable interest rate trend may mean that the credit obligations can no longer be met. This protects the predictability of a fixed-rate loan.
If the financing is a larger sum and also a longer term, it is recommended to take at least part of the loan amount at a fixed interest rate.
On the one hand, this reduces the risk of defaulting on rising interest rates. On the other hand, the possible loss in the form of overpaid interest rates is lower as interest rates decline.
Especially with a low level of interest rates at the time of borrowing, the safety of a fixed interest rate should always be given preference over the risk of unclear interest rate developments. Because a low interest rate level will hardly be able to sink much further.