What is the Difference Between a Variable Rate and a Fixed Rate?

Taking a student loan can feel like a rollercoaster. So what's the difference between a variable rate and a fixed rate?

Flickr user Vincent Nguyen

Taking out a student loan is one of many ways to pay for college, and is oftentimes a last resort method after students have exhausted other avenues like scholarships and financial aid packages from colleges.

A lot of questions surround students loans: should I get a federal or private student loan? What happens if I end up defaulting? How can I lower my payment? And this article aims to solve another one: What’s the difference between a variable rate and a fixed rate?

Variable Rate

The key here is the word “variable” meaning, essentially, subject to change. With variable rates, the interest rate can go either up or down (depending on the index rate). Variable rates can be a bit of a gamble, because on the one hand you might score a lower interest rate, but on the other it might go up. This also affects your payments—you could end up paying more one month and paying less another month, or vice versa. Variable rates are generally not recommended for longer term loans.

Fixed Rate

If you’re looking for a little bit more structure and permanence, look into fixed rates. With these, what you see is what you get. Fixed rates do not fluctuate and instead stay constant throughout the duration of the loan. So if you want steady payments instead of ones that can roller coaster, you might want to opt for a fixed rate.

 

Allison Wignall

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