Finance
Fixed Rates vs Variable Rates: Which Should You Choose?

This means that your monthly payment may fluctuate based on market conditions, making it more difficult to predict your total cost of financing over time.
For example, let’s say you have a $100,000 loan with a 5% variable interest rate and a 10-year loan term. If the benchmark rate index is 3% and the basis point margin is 200 bps, your total interest rate would be 5%. However, if the benchmark rate increases to 4%, your total interest rate would then be 6%. This change would impact your monthly repayment amount and overall cost of lending.
While variable rates can save you money in favorable market conditions, they also pose a higher risk due to their unpredictability. It’s important to carefully consider your financial situation and risk tolerance when deciding between fixed and variable rates.
Ultimately, the decision between fixed and variable rates will depend on your financial goals, risk tolerance, and current market conditions. By understanding how both rate types work, you can make an informed decision that aligns with your business needs and borrowing costs.
This means that if market rates are high, you’ll pay more over the course of your financing term, whereas if rates are low, you could save money when compared with fixed rates.
For a scenario involving variable rates, let’s use an example that demonstrates how the rate might change. In this sample, we’ll assume the lender is using the Prime Rate as the benchmark index rate and appoints a basis point margin of 200. That would look something like:
8% (Prime Rate) + 2% (200 bps) = 10% interest rate
Now, since this is a variable rate, the Prime Rate is subject to change periodically and will impact the current variable rate assigned to the loan. For example, say market conditions allow for a Prime Rate adjustment with a decrease of 50 bps, therefore lowering the base rate to 7.50%. The rate structure of the financing agreement would then also adjust accordingly to account for this 50 bps rate decrease, and the new variable rate would be 9.50%.
Fixed rate financing can have advantages for those with a strict budget, need long-term financing, or have minimal risk tolerance. On the other hand, variable rates may benefit those needing short-term financing, wanting to take advantage of favorable market conditions, or comfortable with potential risk. When considering whether to choose a fixed or variable rate for your financing, it is important to be comfortable with the level of instability that comes with a variable rate. Make sure your budget allows for rate fluctuations, both positively and negatively, as variable rates can change at any time based on market conditions.
Factors to consider when choosing between a fixed or variable rate include determining your budget, evaluating the risks associated with rate changes, reviewing short- or long-term financing options, and comparing the total costs of financing. It’s important to analyze your financial situation and risk tolerance to make the best decision for your borrowing needs.
If you are looking for a business loan with both fixed and variable rate options, consider using Lendio as a broker to connect you with multiple providers with a single application. They offer a wide variety of small business loans with favorable rates and terms.
Ultimately, the choice between a fixed or variable rate depends on your individual preferences and financial circumstances. Consider your risk tolerance, budget, and loan terms to determine which option is best suited for your borrowing needs.
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