There are two different loan rates to choose from when financing student loans: fixed and variable. Fixed loans have their interest rates locked in for the life of the loan. A variable loan has an interest rate that fluctuates; if the market's rate is high, then variable interest rates will be high, but if the market is low, borrowers can take advantage of the lowest interest rates.
The Benefits of Switching to a Variable Interest Rate
While many consumers may prefer a fixed rate, there are some benefits to choosing the variable rate. Keep these benefits in mind when you are comparing rates with platforms such as Credible.
- The Rate Could Fall: With a variable rate, your rate will automatically drop if the market's rates drop. Therefore, if you started off with a 4 percent interest rate and the lender's rates dropped to 2.25 percent, then your loan would automatically adjust to that rate. With a fixed loan, you would have to refinance your loan to get a lower interest rate. Refinancing a loan can be costly and timely. When your interest rate drops, usually your monthly payment will drop too.
- Lower Interest Rate Offers: To entice borrowers, many lenders will offer low initial rates for a period of time. Depending on the duration of the low introductory rate, you could benefit from lower monthly payments for several years.
- Interest Caps: Many loans come with a cap for how much percentage or payment you will pay. These caps protect you from paying too much. Know if the loan has a periodic cap, which limits how much your loan can increase each year, or if your loan as a lifetime cap, which limits how much your rate can go up for the life of your loan.
Who Is a Variable Interest Rate Best For?
A variable interest rate loan is not for everyone. It is hard to predict whether the market's rates will rise or drop lower. Therefore, switching to a variable interest rate should be considered if you are one of the following:
- Borrowers Planning on Paying off Their Loans Faster: If you are planning on doubling or tripling your monthly payments to pay off your student loan in a short amount of time, then variable loans might be better for you. The more months you pay off ahead of schedule, the less time you will be exposed to interest rate risk. You can also take advantage of low interest rates with this option.
- Borrowers Prepared for the Risk: Since variable interest rates can rise or fall at any time, those who are thinking of this type of loan should be comfortable with the risks. You should have extra money set aside each month to account for a fluctuating monthly payment.
- Borrowers Willing to Refinance Again: If you wish to take advantage of low variable rates, considering taking out a variable rate loan. If rates begin to rise again, then you can always refinance back to a fixed rate if you are worried about your rate getting too high.
If you find yourself asking, "Should I switch to a variable interest rate?" do your homework. Assess your financial situation and know whether you will be able to fully benefit from taking on this type of loan. Most importantly, calculate how much a variable loan will save you or cost you in comparison to a fixed rate.
You can use Credible to get an exact variable rate refinancing offer and compare this to your existing loans to find out if it's worth the switch.
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