Fixed Interest Rate Loan
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A fixed interest rate loan tends to be a better choice in loans when working to plan a budget and map one's financial future. This is due to the regular payment amounts it promises which lend better budget stability. A variable interest rate loan can be a little trickier in budget plans, but still manageable in the planning process. The main thing about the fixed rate note is that the borrower will always know how much the finance charge amount is. One will never have to question it. However, while a variable note's finance charges change annually or every few months depending on the terms, the disclosure guarantees not to exceed a certain amount within several points.
If a borrower understands how finance charges vary, then they will not have a problem knowing what to expect in the repayment. But if one does not understand how the finance charges vary, then the note may cause confusion and problems when the payment amounts change. A stable payment amount also assures that they don't have to worry about paying more than originally expected. However, it is possible that they may end up paying more finance charges in the long term with some loans, especially if the prime index drops. This key index determines the trend of all interest rates and a drop in the prime means note rates drop too.
When determining whether to get a fixed or variable interest rate loan, the first thing to do is to determine what kind of note one is applying for. The different interest types will be more appropriate for long term versus short term loans depending on the purpose of the note. For instance, a fixed interest rate loan on student funds that have to be paid back right away might be the best option for the purpose. A set amount will not lend any surprises and the payee will always know what to be sure to have available for the payment as part of their monthly budget. However, if getting student aid that doesn't have to paid back right away, they may find lower rates will be available with a variable interest rate loan at the time they begin repayment and have a more flexible income. The problem with this is not knowing what the future rate will be when the student note comes due and payable.
Another example is when applying for car financing, the borrower may want to use a fixed interest rate loan also. What would be advisable in a auto purchase situation is to add up the savings between a variable and a fixed rate agreement. The borrower may find that they can save more money if they take the flexible contract. But if adding it up correctly, the variable contract may turn out to be more if the payoff is a lot higher than the unchanging payment note. When purchasing a car, it makes sense to simply do the research. This will help determine which one will work best for that situation. Doing the math will also help to have no regrets about which note is chosen because of the borrower's understanding of what the options were.
In getting a home mortgage, one may think that a fixed mortgage would be best, but this is usually not the case. If applying for a house loan, which is usually for twenty to thirty years, then the variable interest rate loan is probably the only way to go. This is simply because of the amount of time that the borrower will have the mortgage. A variable interest rate loan will help achieve lower interest rates at times when the prime rate drops and mortgage rates drop too. A fixed interest rate loan will stay at the same place the whole time, but with a changing economy, the number of points that rates could drop could make the mortgage highly overcharged and then the borrower will have to consider refinancing for a lower interest loan. The variable rate could possible keep getting higher and higher over the course of the life of the mortgage, and the cost may almost double what the purchase price. However, it could drop and the payments will be cut in half. With a fixed interest rate loan there is no worry about what the payment amount is going to be, but the overall repayment could be more over the life of the note.
When the necessity of a loan arises, a Christian needs to spend time in prayer about which type loan to get. Both types of interest rates have their positives, but it is important to determine which is best for the situation. The Lord will guide in these decisions and help find His will. This is greatly important so that He can show His strength even in the use of a loan. The Lord will provide wisdom when making this decision and help determine what works best for the situation. "O love the LORD, all ye his saints: for the LORD preserveth the faithful, and plentifully rewardeth the proud doer." (Psalm 31:23)
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