Choosing a variable or fixed interest rate depends on what option will work best for you. There are advantages to both loan options. Which is better for you will depend on the interest rate environment when the loan is taken out and for the duration of the loan. Many borrowers will refinance loans during a healthy and robust economy.

A Variable or Fixed Interest Rate?

In order to understand interest rates, a variable interest rate loan has the interest rate charged on the outstanding balance and the interest rate will vary as market interest rates change. As a result, your payments will change as well. A fixed interest rate loan will keep the interest rate charged on the loan will remain fixed for the entire term of the loan. Your payments will remain the same over the entire term.

A fixed interest rate loan will be set at the prevailing LIBOR market interest rate and sometimes involve a plus or minus depending on the borrower. It is better to lock in at a fixed rate if the current rates are low, but are about to increase. On the other hand, if interest rates are declining, it is better to go with a variable interest rate. Fixed rates are based on an index which changes quarterly. Most interest rates assigned to any loan is based on LIBOR as well as the creditworthiness of the borrower at time of application.

One of the most important things to remember about interest rates is that studies have shown that a borrower is likely to pay less interest overall if they choose a variable rate for their loan. The borrower must take into mind the amortization period of a loan. In other words, the longer the loan, the greater the impact of interest rates upon payments. adjustable-rate mortgages are great in a decreasing interest rate economy, but when interest rates rise, that sharper payment could become a financial hardship.

Ultimately, a loan rate is reflection of the borrower’s financial health and credit. Comparing rates between lenders can be frustrating. Variable rate loans begin as a lower rate, but the risk is still there that the rates will increase over time. Fixed income rates are less risky. Rates will vary depending on the length of repayment; a shorter term loan gets a lower rate. It is worth the time in research to compare what lenders rates are.

College Student Loans: Federal and Private

Federal loan borrowers are already set at a fixed rate. Taking this into mind, it could be beneficial to refinance loans as a private debt. Remember, by doing so certain federal protections like deferment and loan forgiveness programs become unavailable.

The rate for federal student loans is set prior to July first of each academic year. If you add four years of college with loans every year, it is probable the loans all have different interest rates. When it comes time to pay all those loans you may want to opt for loan consolidation if the interest rates are low. Combining loans into one single loan makes good sense.

Private student loans offer both variable and fixed interest rates. If you are a borrower not comfortable with risk, then opt for a fixed rate on private student loans. The first thing you will notice while comparing rates is the fixed rate is always higher. This is due to the fact that loans are repaid over a relatively long period of time so lenders set rates so they don’t lose out on the interest margin. It is kind of like betting. You are basically betting interest rates won’t rise when you choose a variable or betting that interest rates decrease when you choose a fixed rate. No one can predict the future, so trying to choose between a variable or fixed rate like this is futile.

How to Choose

The best advice is to compare all options and then make a choice which feels right for your current and future situation. If you are money savvy, then either rate works in your favor. Some people want the shorter term loans to be done with it. Some are looking at now, while others have already planned their financial path. There will be opportunities in the future to refinance a loan, dependent on credit worthiness. If financial hardships do arise, seek out deterrent loan programs to prevent the loans from going into default, and against your credit score. If you need further help, get in touch with a financial planner or other qualified professional.