What’s the difference between fixed rate loan and adjustable rate loan

Category: Loans 42 0

When taking out a loan you need to pay the amount you took, back to the lender. However, you will need to pay back the money with accrued interest, this is because the lenders need to make a profit, and this is how they do it. There are manyfactors which affect the rate of interest you pay, these factors include; interest rates in the economy at the current time, your credit score, and the terms of the loan you took out. There are to categories when it comes to loans and how the interest rate will work, these categories are;fixed rate loans and adjustable rate loans. When taking out a loan you need to understand the terms and conditions, so you can choose the best type of loan for your specific situation. It is important to understand what you need as you could be taking out a loan to purchase a house, and this is one of the biggest decisions you will make during your life. If you do not understand the terms and conditions, ask SunWest Mortgage or use the payment calculator to see what type of loan would be the best for you.

Fixed rate loans:

This type of loan has an interest rate which will remain the same throughout the loan, no matter how long it takes. This loan has a specific interest rate which is locked, this means that you will need to pay back the loan according to that interest rate, this will not change depending on external factors such as the economy and what it does to interest rates as a whole. The benefits of this type of loan are that you will know how much money you will need to pay back beforehand, this will allow you to plan how much money you will give back every month and how much money you are able to spend without going over a certain limit that you may set for yourself.

Adjustable rate loans:

This type of loan includes an interest rate that can change over time.When you take out this type of loan, the lender you borrowed it from is able to change the interest rate of the loan depending on the current interest rates in the economy. This means that the amount of interest you need to pay back can either increase or decrease. These types of loans are considered riskier as you cannot be sure what will happen to them, they are unpredictable. Your interest rate could be low at the beginning and then it could suddenly sky rocket and greatly increase the cost of the loan you took out. However, if the economy is doing well then, your interest rate could decreasewhich will allow you to save money.

These types of loans could have a rate cap, this means that the lenders will set an amount which the interest rate of the loan can not go above. This will limit the amount of money you will have to pay by a certain amount as if the economy isn’t doing well you won’t be affected to badly. Moreover, adjustable rate loans are quite popular due to their initialaffordability and availability, this means that they are usually taken out by people who have a decent credit score.

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