When preparing to get a loan, you’re sure to come by some confusing jargon. One of the most common phrases involves different loan rates, including variable, fixed-rate, and split-rate loans.
Those terms might sound technical, but they’re actually pretty simple. In this blog post, we’ll talk about fixed-rate loans, and consider their benefits and drawbacks.
What is a Fixed-Rate Loan?
Every type of loan, no matter if it’s personal or a home loan, or a business loan, incurs an interest rate. An interest rate is a monthly payment you make to the lender based on the overall sum you’re borrowing. This payment helps the lender cover the costs of doing business and helps protect them if the borrower cannot pay back the money they’ve been loaned.
The specific interest rate you’re charged depends on several factors, including the type of property you’re buying and your credit history. But the most important factor is the decisions made by the Reserve Bank of Australia. When the RBA wants to increase borrowing, they will lower national interest rates to make it easier for lenders to approve loans. When they need to combat inflation, the RBA will raise rates, which limits the amount of money borrowers can get.
With some types of loans, the interest rate can rise and fall according to the RBA’s decisions. So while they may end up paying a lower interest rate for some time in the loan’s lifetime, they may end up paying higher amounts later on.
A fixed-rate loan is not subject to these changes. With a fixed-rate loan, the lender offers a specific rate at the beginning of the process and it does not change throughout the life of the loan.
What are the Pros and Cons of Fixed-Rate Loans?
The major benefit of a fixed-rate loan is its consistency. Borrowers do not need to worry about what the RBA does, because they’re already locked into a rate. They can make their budgetary plans accordingly.
But in the same way that fixed-rate borrowers will never have their rates raised, they will not have them lowered, either. This means that they will not pay less each month, no matter what the RBA decides.
Also, some lenders charge fees for ending a fixed-rate loan early.
Is a Fixed-Rate Loan Right For Me?
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