Fixed or variable interest rate on loan? What are the pros and cons?

Applying for a loan is always a bit exciting.

It also requires some work to prepare you well . If you go to a bank, you should ask for both interest rates . This way you can compare them and determine which ones you will take. This can have a big impact on the interest you will eventually have to pay.

Option 1: fixed interest rate

A fixed interest rate means that you pay the same interest during the total repayment period . When you take out your loan, it is thus determined how much the interest rate will be.

Benefits

  • You know perfectly well at the start of your loan how much you will have to pay monthly.
  • With a low interest rate, you are sure that you will always continue to pay off this low interest rate.
  • You can have a loan with a fixed interest rate revised, the interest rate had to be very low compared to your interest rate.

Cons

  • If the interest rate drops after closing your loan, this does not affect your payments.
  • When reviewing your fixed interest rate, you have to pay a reinvestment fee on that part that you still have to pay.

Option 2: variable interest rate

With a variable interest rate you do not know this in advance and it will vary and how much . This can be either positive or negative.

Benefits

  • If the interest rate drops, you will also have to pay less. With a high interest rate you obviously have a chance that it will fall.
  • The maximum fluctuations of the interest rate are legally fixed. For example, the interest rate can double as much as it is higher. And he can drop to 0%.
  • You can also get an extra limitation on the swing at certain banks. In this case one speaks of a ‘cap’ or upper limit of the fluctuation. For example, your upper limit may be +2, which means that your interest rate can never rise more than 2%.
  • In addition, you can also limit your risk by, for example, adjusting the interest rate annually, but changing it every 3, 5 or 10 years. Each bank has different options in this respect, so be sure to ask for it .

Cons

  • You never know when you sign your loan how much you will have to pay in total.

Option 3: accordion loan

This type of loan combines the best aspects of both fixed and variable interest rates . So you know perfectly how much you will have to pay monthly. If the interest rate fluctuates, your repayment period will simply be shorter or longer.

So if you want to take out a mortgage loan then certainly weigh the pros and cons. And let different simulations make. Make an appointment with a bank in your neighborhood and calculate your loan in advance .