Personal loans are a lifeline for consolidating debt, home renovation, or covering unexpected expenses. Like other loans, it involves interest rates. Loan seekers have one question: Is a personal loan fixed or variable? Basically, it can be both fixed and variable. Even though more than 90% of borrowers prefer fixed ones, some might choose variables. Our master financiers explain the nuances with their pros, cons, etc.
Personal Loan with Fixed Interest Rate
A personal loan with a fixed interest rate is a financial product. You pay a stable monthly installment over the loan duration. In essence, the interest rate remains unchanged throughout the entire loan term. In a sense, it ensures predictability and peace of mind regarding personal finance. Besides, using a personal loan to buy a house is tricky.
How It Works
For example, if your agreement stipulates a 5% interest rate for five years, that rate remains unchanged throughout the entire five-year period. Consequently, your monthly payments remain steady. It helps effective budgeting with forward planning and understanding your total borrowing costs.
A fixed-rate personal loan makes you lucky. Even when inflation escalates or the Federal Reserve adjusts its benchmark interest rates, your loan’s interest rate remains just the same.
A fixed-rate personal loan comes from various lending sources, including banks, credit unions, and online lenders. Their eligibility requirements may differ. Typically, most lenders seek a credit score ranging from 580 to 669 (considered “Fair” credit). Nevertheless, a higher credit score avails you a more favorable interest rate, i.e., lower rates. Additionally, lenders assess your income, debt-to-income (DTI) ratio, and other relevant factors.
When applying for such loans, you must provide essential documents such as a loan application, proof of identity (e.g., driver’s license, passport), income verification, and proof of address (e.g., utility bills). We recommend direct communication with the lender. So you can determine if additional documents are necessary to expedite your application and avoid delays.
Advantages and Disadvantages
The table below showcases the perks and drawbacks of fixed-rate personal loans.
| Pros | Cons |
| makes debt management easier. | No reduction in interest rate. |
| Easy to calculate the payments. | Stuck for a longer period with the same financing. |
| Low-interest rate. | |
| No uncertainty. |
Personal Loan with Variable Interest Rate
A personal loan with a variable interest rate operates differently from its fixed-rate counterpart. Variable-rate loans come with fluctuating interest rates. Various financial institutions, including banks, credit unions, and online lenders, offer variable personal loans. Lenders may have different criteria for eligibility. Typically, it includes credit score, income, and debt-to-income ratio.
How It Works
The interest rate on your loan is subject to potential adjustments. Many factors determine these fluctuations. The most prominent factors are alterations in the official cash rate determined by the Federal Reserve, regulatory modifications, shifts in operational costs, shareholder interest changes, and so on.
For example, let’s assume you take a $10,000 personal loan with a variable interest rate tied to the U.S. Prime Rate, which is currently 3.25%. The loan duration is 05 years (60 months). Considering this, the monthly and total payment calculation is as follows:
- Loan Amount: $10,000
- Initial Interest Rate: 3.25%
- Loan Term: 5 years (60 months)
- The initial monthly payment is approximately $181.94
But, after a 3-month period, an adjustment in the interest takes place due to changes in market conditions. Now, the calculation will be like this.
- The prime rate increases by 0.25%.
- New interest rate: 3.50% (3.25% + 0.25%).
- The new monthly payment is approximately $185.10.
The interest rate can also go down, and in that case, your monthly payment will also decrease.
Most importantly, you can make additional repayments on the loans. This flexibility accelerates your loan repayment process and reduces the overall interest costs.
Advantages and Disadvantages of Personal Loans with Variable Interest Rate
The below table shows the pros and cons of personal loans with variable interest rates.
| Pros | Cons |
| Good chance to make big money fast. | Involves risks. |
| Interest rates can decrease significantly. | There is huge uncertainty. |
| Good short-term finance. | Can lose money. |
Our Experts Choosing Between Variable & Fixed-Rate Personal Loans
Our expert opinions explain a personal loan at both rates.
Go for a fixed-rate personal loan if your condition meets the following points:
- You have a long-term financial goal.
- You prefer a simple and steady debt repayment plan.
- Getting a personal loan at a very low-interest rate is possible.
- You prefer predictability in loan repayment.
Go for a Variable-rate personal loan if your condition meets the below points.
- If you are looking for a short-term financial opportunity to make a handsome amount of money.
- Your risk tolerance level is high, and you are a big player in the financial market.
- You are sure that the interest rate will fall quickly: the market indicators are saying so.
- You prefer a greater amount of flexibility in repayment.
Final Words
The choice between fixed or variable rate-based personal loans is a critical decision. So, is a personal loan fixed or variable? We hope our guide will help you make an informed decision. Learn more about fixed vs variable personal loans.
Fixed-rate personal loans are stable and predictable. So you can count on consistent monthly payments throughout the life of the loan. Conversely, variable-rate personal loans have an element of flexibility and potential cost savings. These loans often begin with lower initial interest rates, making them attractive to borrowers seeking lower upfront payments.