There are many different reasons why you might take out a loan. You want to consolidate debt. Increase cash flow. Start a new business. Or even take control of your personal expenses. For every “use of funds” out there, is a lender who offers a slightly different solution to help you achieve your financial goals. That’s why it’s important to ask questions upfront, and understand the underlying features of the loan before moving forward with the application process.
One feature that could have a significant impact on your financial health is if the loan offers a fixed or adjustable rate. Here’s what you need to know about each type, before taking out your next loan:
Understanding Fixed vs. Adjustable Rates
- Fixed rate loans have a set interest rate, which remains constant for the lifetime of the loan. This means you’ll know the amount of interest you’re paying from day one.
- Adjustable rate loans are less predictable, with interest rates that fluctuate with the market index. Though they can start out lower than fixed rates, they can rapidly increase based on factors like the market, the economy, or the financial situation of your lender. Interest rates for adjustable loans may change yearly or even monthly, without warning.
Two Reasons to Pursue a Fixed Rate Loan
Based on these definitions alone, it’s clear to see why a fixed rate loan is the better option. Here are two more reasons why you should pursue a lender who offers this loan type:
- Eliminates Financial Uncertainty Today
One of the primary reasons people consider taking a loan is to improve their financial well-being—not worry about their finances each month. With a fixed rate loan, your monthly payment won’t change unexpectedly, affect cash flow in unforeseen ways, or interrupt your day-to-day operations.
- Improves Your Ability to Plan for the Future
Not knowing when or how much your interest rate will change can make financial planning and budgeting almost impossible. A fixed rate solution provides consistency and reliability over the life of the loan.
Understanding how different loan types can affect your overall financial situation is an important step in creating financial stability. Eliminate uncertainty around your monthly payment and make financial planning simpler by pursuing a fixed rate loan, and a financial partner who has your best interest in mind.