As you research private student loans, you’ll come across the terms: fixed interest rate and variable interest rate. But what exactly does that mean? How do you choose between them?
The Difference Between Fixed and Variable Interest Rates
With a variable rate loan, the interest rate will change regularly depending on the market conditions. They could go up, or they could go down month by month.
In a fixed loan, the interest rate is set when you take the loan and that rate is fixed for the entire time. The rate does not depend on the market conditions.
Both of these have their pros and cons, which you must understand in order to make the right choice.
Variable Rate: Pros & Cons
The advantage of variable loans is that you may benefit from lower interest rates under the right market conditions. This could reduce the overall cost of the loan over the long term.
The disadvantage is that the opposite is also true. The cost of your loan could increase if the market changes. Another downside of variable rates is that you cannot predict your monthly payments, making it difficult for you to create a solid long-term financial plan.
Fixed Rate: Pros & Cons
The advantage of fixed interest rates is that you know exactly how much you have to pay every month and can create a solid long-term financial plan.
The downside of this option is that you could potentially be tied in to higher interest rates, as compared to variable rates.
Which one you should choose will depend hugely on your appetite for risk, or your desire for consistency.