Variable Interest Rates
Understanding variable interest rates is crucial for anyone who is thinking about taking out a loan of any size. Banks turn a profit by charging borrowers for the privilege of taking out these loans. Whenever lending institutions grant loans they are taking a risk and expect to be compensated for this risk. These charges might come in the form of fees but will also generally come in the form of interest rates. A rate that stays the same over the life of the loan is called a fixed rate. But rates that change according to movement in the market are called variable interest rates. Understanding the full cost of a loan and the reasoning behind the charges that are assessed is important. There are a variety of loans that are offered by most lending institutions and these loans can cover a number of different purposes. Mortgage financing allows borrowers to purchase a home or a piece of real estate. Signature loans may be granted on the good name of the borrower. Home equity loans give borrowers the opportunity to borrow against any equity that a piece of property has attained. Other loans may require collateral such as a car or other asset. The benefits and drawbacks of these various lending opportunities and the terms that apply to them should be clearly understood before a borrower signs any lending agreement.
There are different risks that are considered by both borrowers and lenders when granting or obtaining financing. These risks are taken into consideration when establishing variable interest rates. A lender will always be concerned about whether or not a borrower is capable of paying back a loan. A borrower is concerned when taking out a loan with variable interest rates as well. This concern will usually center on whether or not the rate on the loan will climb too high. Financing makes it possible for individuals to realize dreams such as home ownership. Saving up enough money to purchase a home or automobile out right is impossible for most people. Borrowing the funds that make these purchases possible is often the only option. Businesses must obtain financing as well if they are to grow. Finding loans that offer the most economical terms can make the difference between success and failure for many companies and families. Mortgages with adjustable rates will often share common features. An adjustable rate mortgage, or ARM, will carry interests that reflect the current market index. Certain caps may apply to the amount of interest that is charged, depending on the terms of the original loan. Conversion clauses can allow a borrower to convert to a fixed rate at some time in the future. In addition, many lending agreements will allow the borrower to pay the loan off ahead of time if they are able to do so.
Many factors can impact variable interest rates. These factors may include supply and demand, inflation, and the influence of the Federal Reserve. As with other areas of commerce, supply and demand will have an influence on the rate that a lending institution might charge. When the demand for credit is high, interest will tend to climb. A reduced demand for credit will tend to lower these charges. In the same way, as inflation climbs interest rates will climb as well. The reasoning behind this has to do with the fact that any money that has been borrowed will have less buying power by the time that it is paid back. To cover this loss, banks will raise the fees that they charge for borrowing. The Federal Reserve establishes the amount of money that banks and lending institutions can charge each other. The level of these charges will eventually have an impact on the cost of financing that average consumers will face. Since banks and lending institutions can change the kinds of fees and charges that are applied to loans that are offered to businesses and families, borrowers face a choice when selecting a lending plan. Choosing variable interest rates when applying for financing can mean that monthly payments will rise as market conditions change. For some borrowers, this fluctuation of payments is an uncomfortable way to obtain financing. A fixed rate may provide extra security when this is the case.
The length of the financing can have a bearing on variable interest rates as well. If a loan is extended over a long period of time, such as a home mortgage, banks may feel that they are taking a greater risk. Greater risks can mean that a lending institution may feel that the fees that they charge should be higher. Whatever type of loan a borrower might need, understanding the different rates and fees that are charged is important. The Bible talks about the blessings of trusting in God. Blessed is the man that trusteth in the Lord, and whose hope the Lord is. (Jeremiah 17:7)
The choice between fixed and variable interest rates can depend on the needs of the borrower. When rates are low, a borrower might choose adjustable mortgages, especially if they expect to live in a home or own a piece of property for a short period of time. Fixed financing can be a better choice if a homeowner is planing on remaining at the address for many years. For many borrowers, knowing that a monthly payment will not rise is very important. On the other hand, adjustable loans can end up saving money if the cost of financing declines.
Variable Interest Rate LoanChoosing a variable interest rate loan can be a cost effective way to finance a big ticket purchase. Of course, any borrower will want to make sure that they understand all of the terms and fees that any lending agreement entails. Adjustable rates will go up and down depending on the activity of certain market indexes. This is in contrast to fixed rates, which remain the same throughout the life of the loan. Many borrowers prefer to go with fixed loans simply because they prefer the security of knowing that a monthly payment will stay relatively the same. The idea of risking making much higher payments in the future does not appeal to these borrowers. Yet there are also borrowers who understand that they can end up saving money with an adjustable lending agreement. When rates are low, adjustable loans can offer very attractive repayment plans. If the lending agreement will be of a short term nature, the risk involved is considerably less than with longer term financing. But even with long term financing such as home mortgages, a variable interest rate loan can end up saving money in the long run if market conditions remain favorable. However, when the market drives rates up, the borrower can end up spending a lot more money in charges and fees than with fixed financing.
Obtaining a variable interest rate loan can be a good idea regardless of the type of financing that is needed. Whether a borrower needs money for personal or business reasons, there can be occasions when adjustable rates are the best option. With business lending, borrowers may have the choice of paying off a loan in a lump sum if the opportunity to do so arises. Many business owners will choose to do this, particularly if it seems likely that lending rates are about to climb. A wise business owner will keep a sharp eye on market trends to avoid paying too much money on any business financing that they have been granted. New businesses can sometimes be at a disadvantage. If a business has been in existence for a while, there are certain discounts that lending institutions may offer. Generally, lending agreements that involve larger sums of money will offer higher discounts. In most cases, these discounts will only remain in effect for a specified amount of time, usually the first six months to one year of the life of the loan. When this period of time has ended, the current rates will kick in and payments may increase dramatically. For businesses that are confident that they can pay off the financing within the discount period, saving money on a variable interest rate loan can be a very wise move. Overall, the purpose of the loan and the health and future prospects of the company in question will dictate which type of financing would be the most cost effective.
Some variable interest rate loans might come in the form of open ended home equity financing. These lending agreements offer the borrower the advantages of a revolving line of credit. This basically means that a borrower can obtain funds as they are needed, up to a certain amount of available cash. In some cases, funds may be available for up to thirty years. Many families will use these funds to cover the cost of a home renovation or to pay for a child's college education. Payments will also include the interest that may be due that month.
Automobile financing can also come in the form of variable interest rate loans, although this can be much more difficult to attain. No all automobiles may be eligible for adjustable rates. Since cars are regarded as depreciating assets, the kind of financing that is available will differ from assets that will increase in value, such as home mortgages. There are specific stipulations that will apply to older cars or cars that, for one reason or another, have a lower market value. Borrowers should avoid putting themselves in a situation where they owe more on the automobile than it is worth. When this is the case, it can be difficult to refinance a car loan, or to trade the car in on the purchase of a new vehicle. In most cases, obtaining adjustable rates on vehicle loans can be difficult, regardless of the value of the car that is serving as collateral for the loan.
Making a choice between a fixed or variable interest rate loan will depend on the purpose of the financing and the terms that are involved. There are organizations that offer predatory terms, particularly for consumers who have poor credit scores. A careful examination of the terms of any lending agreement should always be understood by the borrower. This will hopefully prevent a borrower from falling prey to unscrupulous lenders. The Bible discusses the attitude that believers should have toward those who treat them poorly. But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward shall be great, and ye shall be the children of the Highest: for he is kind unto the unthankful and to the evil. (Luke 6:35)
When choosing to agree to the terms of variable interest rate loans, a borrower should understand that a lender must disclose certain facts. Lenders must disclose the actual cost of the loan over the course of each year. This cost is called the annual percentage rate, or APR. The APR will include both the cost of fees and the expense incurred through interest payments. Since lenders are required to supply this information, borrowers should make sure that they fully understand the data that is presented to them before signing a lending agreement.