When you apply for a student loan, most lenders will offer you the option to choose between a variable or fixed student loan interest rate. Some lenders also offer a third option – hybrid interest rate. A hybrid loan offers a combination of features. That means combining the pros and cons of fixed interest rates and variable interest rates.
Let’s go over the three types of loan interest rates.
Fixed Rate Loans
With the fixed interest rate option, the rate is set at the time of taking the loan. That interest rate remains the same throughout the life of the loan. The reason this option has been so popular with students is because of its consistency and security.
When you choose the fixed rate option, you know exactly how much you have to pay back every month. This makes it easier to calculate your finances for the month. However, there is a con. The downside of fixed interest loans is that you will not be able to benefit from lower interest rates if and when the rates go down. You could end up paying a higher interest rate on your loans eventually.
Variable Rate Loans
With the variable interest rate option, the rate of interest keeps fluctuating throughout the life of the loan. The rate is dependent on the market conditions.
The downside is that you may pay higher interest rates if the markets go up. Another downside is that your monthly payments could change every month, making financial planning difficult. Variable rate loans are more of a gamble.
Hybrid interest rates are a combination of a fixed and variable rate. When you choose this option, you pay a fixed interest rate for the first five years of the loan. You then get a variable rate for the second five years of the loan. As an additional incentive to prospective buyers, lenders usually offer a lower rate on the fixed rates.
Benefits of a Hybrid Loan
The biggest benefit you get when you choose a hybrid loan is the savings from the lower interest rates you pay on the fixed rate portion. This will be, in all likelihood, the lowest rate you will be able to secure for the first 5 years of your student loan payments. And when you consider that the low rate is applicable over five years, what you save by way of interest can add up.
Another benefit is the potential to get an even lower variable interest rate after the initial five-year period. This could contribute to your savings.
So Hybrid, Variable, or Fixed Student Loan?
So which works best for you? There’s no one-size-fits-all answer. Some are willing to adopt the risks if it means a lower rate with variable interest. Others prefer the consistency of fixed. Some like the mixture.
Choosing the hybrid rate option on your student loans truly gives you the best of both worlds and is worth considering.
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