The Differences Between Fixed and Variable Rate Loan RefinancingNovember 9, 2016
What is the difference between a fixed rate and a variable rate loan?
Which option is best for refinancing a student loan?
When borrowers begin to consider their options regarding refinancing a student loan, one of the most commonly asked and most heavily debated questions revolves around deciding between fixed and variable rate loans. While the details of each loan type are fairly simple, the crux of the debate is centered around what will be right — and best — for you. If you are still undecided, take a look at the following details to help you better understand and choose between a fixed or a variable rate loan.
Fixed Rate Loans
A fixed rate loan is a loan that has an interest rate that does not change over the life of the loan. This means you will pay the same amount in interest each month, but it also means you will know exactly how much interest that you will pay over the life of the loan.
Variable Rate Loans
Variable rate loans, on the other hand, have an interest rate that will fluctuate during the term of your loan. These fluctuations are directly linked to changes in common financial indexes, such as the LIBOR index, typically by adding the current index amount to a fixed margin defined by the lender to determine the current rate. Compared to fixed rate loans, variable rate loans tend to have lower starting interest rates for the same term, but this can change (and increase) after your loan closes. However, most lending institutions, including Education Loan Finance, put an interest rate cap on variable rate student loans. For example, Education Loan Finance caps its variable rates at 9.95 percent on 5, 7, 10, 15, or 20-year variable rate loans. This means that no matter how high the LIBOR rate may increase, you will never pay more than 9.95 percent interest, if you choose a variable rate refinanced student loan through Education Loan Finance.
What Is Your Best Option?
Fixed rate loans tend to be best for borrowers who want to know exactly how much they will be paying over the life of their loan, but they may also be best for borrowers who:
- Want a consistent payment.
- Are on a tight budget.
- Want to eliminate any risk of interest rate changes during their repayment period.
Variable rate loans, conversely, may be best for borrowers who:
- Are looking for the greatest savings potential.
- Have a flexible budget, should interest rates rise.
- Plan to pay back their loan in a shorter amount of time.
Deciding between fixed and variable rate loans on a refinanced student loan, therefore, ultimately depends on what is best for you, your budget, and your personal situation. Plus, you always have the option to refinance your student loan from fixed to variable and vice versa. For instance, if you choose a variable rate loan and you are concerned that rates will continue to climb to a rate with which you are not comfortable during your repayment term, you always have the option to consider refinancing to a fixed rate at no cost to you. Have any more questions? Contact us or give us a call at 1-844-601-ELFI (3534).