Today it is very easy to get Personal Loans in USA. Neither do you need any kind of collateral or security for it, nor do you need to fill in a stack of forms. More often than not, your application is processed within a day or two and the check comes directly to your doorstep. The amount can even be directly credited to your account, provided that you have one with the lender.
No matter how easy it is to acquire a loan, nonetheless, you have to ensure that you have the provision to pay the requisite monthly instalment for the entire tenure of the loan. The most important factor for the payment of EMIs is the rate of interest levied on you. Do keep in mind that a personal loan is a high-risk loan (because of the absence of security) and the interest rate tends to be pretty high. This interest may be of two types: Fixed and Variable. It is upon you which type you choose while applying for the loan.
Fixed-rate financing indicates that the interest rate levied on your loan remains constant over the entire life of your loan. With this, you get a fair idea about the amount of money that you have to pay each month. You might prefer this if you want a loan payment method that would not fluctuate with time. When the interest rate is fixed for a loan, the point of reference is the prevailing rate at the market at the time of application, plus or minus a certain amount that is unique for a particular borrower. Generally, if interest rates are relatively low at that point, but the financial analysts suggest that they are about to increase, then it will, of course, be much better set in your loan at the prevalent rate. So the monthly amount that you have to shell out of your pocket will remain constant even if there is an economic collapse.
Variable-rate financing is one where the interest rate levied on your loan changes, based on a financial market index and the prime rate. With this, the interest rate on the loan changes as the index rate changes, meaning that it can potentially go up or down raising or lowering your monthly payments. If interest rates are on a decline, then it would be a much better option to seek a variable rate loan because you would have to spend less amount of money each month. The longer the loan term, more risky is it to get a variable rate loan because there is more time for the interest rates to increase.
Naturally, a bit of hesitancy of having a variable rate loan is always there and this has to do with the uncertainty of the future. However more often than not it is the interest to choose in quite a few situations. The main or the most crucial factor is not to choose between “variable versus fixed” but rather to determine the “variable versus variable plus an insurance policy.” When you are taking a fixed interest rate loan, you are guaranteeing against an escalation in interest rates. So have to ascertain if you need this insurance.
In order to ascertain this, take a look at the very worst case that can happen – you have to pay the maximum rate of interest that can be applied on your principal. For example, if you borrow $50,000 for 10 years, what can be the highest EMI? Can you afford to pay it? If you can, you might as well take the risk to go for a variable interest rate because you can do without the insurance against the amount.
Also, keep in mind that every portion of principal you pay down, the less are the chances of maximum payments as the interest is calculated solely on the principal that is due. Even in worst case scenario, the interest rates cannot jump to its maximum value all of a sudden. There is a maximum permissible annual increase. So it actually takes several years for the interest to peak. In the meantime, you are naturally paying down the principal and the extra amount you have to pay (if any) might still be less than what you had to pay if you had gone for a fixed interest rate. Additionally, it is always possible to reconfigure your financial compulsions at a later date. After all, money in hand at this point of time is worth much more than the money that you can hope to acquire later, especially if you are at the starting point of your career.
The bottom line is that it is beneficial to get an adjustable rate of interest most of the time for your personal loan. Of course, that does not mean that you would go for it blindly. The more flexible your financial condition, better are the chances of you to triumph over a dire economic depression. In today’s world, a fixed rate loan can only be considered beneficial if the rates rise at a rapid rate very early in the tenure of the loan. If you are going for a short term loan of say 5-10 years and can afford to survive the “worst case scenario,” you might as well give some serious consideration to a “variable rate loan”, be it to refinance for a student loan or to get a mortgage on your house. Just make sure that you have all the figures in your hand before you make an informed decision; rather than blindly base it on a (somewhat) irrational fear of market collapse.
Image courtesy of jesadaphorn at FreeDigitalPhotos.net