When preparing to refinance student loans, a borrower may find themselves wondering what interest rate option is the best fit – fixed or variable? What are the differences between the two and what benefits are available? Refinancing student loans gives borrowers the freedom, as well as the flexibility, to better plan for the future and having the right interest rate is an essential ingredient. By comparing these two rate options, you can make a more educated decision to which financial path is best for you; putting you back in the driver’s seat towards what’s important.
A fixed rate loan is often the most suggested by financial advisors and remains a trendy choice among borrowers. With a fixed rate loan, you have the security of sustainability. A borrower knows the exact rate he/she will be paying during the duration of the loan. For borrowers with longer terms, this can be especially important, because they can plan onward at a more manageable level. Knowing what to expect every month is a perfect planning tool for any borrower interested in starting a family, preparing for a mortgage, or outlining an upcoming adventure. Fixed rates do tend to be a bit higher than variable, but you’ll have the advantage of knowing how to budget ahead of time; leaving you with no surprise increases at the end of the month. A fixed rate loan is perfect for any borrower who enjoys the convenience and consistency of a payment they can predict.
A variable rate loan may be an excellent option for someone who has more disposable income at the end of the month. A borrower with a little financial legroom could pay extra each month to shorten the lifespan of their loan. A variable interest rate typically starts out extremely low, but there is a risk of the rate rising during the term. The interest rate may reset on a monthly, quarterly or annual basis, depending on the terms of the loan, and if there are changes in the economy. Variable interest rates are expressed as the sum of an index rate, which changes periodically, and a fixed margin. It is imperative to pay close attention to the index on a variable rate loan. An unanticipated increase in your interest rate can cause borrowers to underestimate the overall cost of a variable rate loan.