Fixed Rates vs. Variable Rates: What’s The Difference?
The two main types of interest rates you can get on a personal or car loan are fixed and variable interest rates. Both options have their pros and cons, and it’s important to understand these before committing to one, as they can both suit different types of borrowers depending on their needs.
This guide aims to inform the pros and cons of both fixed and variable rates, so you can choose the one that suits you best.
On this page:
- What is a fixed rate?
- Fixed-rate pros and cons
- What is a variable rate?
- Variable-rate pros and cons
- Split-rate loans
- Fixed or variable: which is right for me?
- Jacaranda Finance personal loans
What is a fixed rate?
A fixed-rate loan guarantees a fixed interest rate for a set period of time known as the fixed term. This period is usually for several years, which on a personal loan means they can be fixed for the entire time.
Having a fixed interest rate means that your lender can’t increase your rate no matter how much interest rates fluctuate, and you only have to pay the amount of interest that you agreed on. This secures your repayment amounts for the loan period, which usually ranges from 1-5 years on personal loans. As such, a fixed-rate loan saves you from having to predict your future repayments if they were to go up.
A fixed-rate loan suits people who like to stick to a budget and want to make consistent repayments. At Jacaranda Finance, our loans exclusively offer fixed interest rates for loan terms up to 48 months.
On the other hand, fixed rates might not be the better option if interest rates are falling. You could potentially miss out on some ongoing savings if lenders were to pass on a series of cash rate decreases, for example.
Fixed rates have a number of advantages, which generally include:
- Protection from sudden market fluctuations
- No impact on your repayments if interest rates rise
- Easy to budget your repayments and set long-term financial goals.
Did you know: Since May 2022, the official cash rate has gone up by 2.25%, and most lenders have passed this on to consumers. If you were on a variable-rate loan, your interest rate could have gone up by 2% p.a in just a few short months!
Fixed-rate loans have their downsides too. These include:
- They can be inflexible (this could be a positive or a negative, depending on financial conditions)
- Less freedom and choice
- The disadvantage when interest rates drop as you could be paying more than necessary
- Possible penalties for additional repayments and for switching during the fixed term (up to thousands of dollars in break costs);
- Usually no extra features like redraw facilities that let you access extra repayments you’ve made (these are less common with personal loans in general compared to home loans)
Did you know: Unlike many lenders with fixed rates, Jacaranda Finance does not charge extra repayment fees or fees for paying off your loan early. In fact, we encourage you to do so!
What is a variable rate?
A variable-rate loan does not set one specific interest rate for the duration of the loan. Instead, the interest rate can change due to a number of factors, including the Reserve Bank of Australia’s official cash rate decisions, the lender’s market position, competitor movements and the economy as a whole. As such, the rate of interest you pay could be different from one month to the next, although your lender has to give you advance notice in writing when they intend to change your rate and the size of the increase.
A variable interest rate loan can give you access to additional features that fixed-rate loans generally don’t have. One of these main features is having no extra repayment fees or break costs, although as we mentioned earlier, Jacaranda also doesn’t charge these. This feature can be helpful if you plan on paying off your loan faster than the agreed loan period, and it can help you save on interest in the process.
Variable rate pros
A variable rate loan can be well suited to many different financial situations: for example, it can be useful for people who are okay with taking a bit more of a risk and plan on paying off their loan in a shorter period of time. Some of the advantages include:
- Repayment flexibility (often no fees for additional repayments or paying off the loan early)
- Easier to refinance (you can switch lenders if a better rate becomes available at no cost)
- Decreased repayments if interest rates drop
- Ability to redraw available funds from your redraw facility (if you have one)
Variable rate cons
Variable-rate loans aren’t perfect and have their flaws which you should be aware of before deciding to apply for one. These include:
- Higher repayments when interest rates increase
- Cash flow uncertainty (will you be able to afford a higher interest rate?)
- More difficult to set accurate budgets for repayments and stick to them;
- More difficult to plan financially for the future.
What about split-rate loans?
For larger loans like home loans, many lenders provide the option of a split-rate loan. This type of loan lets you take advantage of both fixed and variable interest rates by splitting a portion of your loan into each. You could, for example, choose to make 50% of your loan variable and the other 50% fixed, giving you the best of both worlds and balancing out the negatives of each.
Split-rate loans are generally not available on personal or car loans, however, as the loan sizes tend to not be big enough.
Fixed or variable: which is right for me?
Both fixed and variable-rate loans can be helpful depending on the circumstances: who is borrowing the money, how much they’re borrowing, what the economic environment is at the time and more are all important factors that can influence which one might be better. Choosing the right rate for your unique situation is very important. This ensures you aren’t paying too much with your repayments and can help you reach your financial goals quicker.
If you’re confident in your finances and budgeting skills and aren’t worried about rising interest rates, you might want to consider a variable-rate loan. This is because you can have more flexibility in making your repayments and won’t be locked into the loan term by break costs.
If you’re looking for some stability however and need a personal loan for a special reason, like a holiday or house renovations, a fixed-rate loan might be the more suitable option. This is because your monthly repayments will stay the same, meaning you can budget more efficiently. It can provide you with certainty in knowing you can repay the loan over the course of the loan period.
Jacaranda Finance Personal Loans
Jacaranda Finance exclusively offers fixed-rate personal and car loans. Our fixed-rate loans, unlike so many others, offer flexible extra repayments at no extra cost, and you won’t be charged anything for paying off your loan early either. This can provide one of the key benefits of variable loans without compromising the security of unchanged repayments.
Our speed and convenience are among the best in the business: you can apply in as little as 5-12 minutes1 and could receive an outcome on your application on the same day.2 Jacaranda Finance is also proud to be one of the first online lenders in Australia to utilise instant payouts. Using the New Payments Platform (NPP), you could have the cash in your account and ready to use within 60-seconds3 of getting approved
If you have any questions about our interest rates and other loan terms, contact one of our friendly staff members or visit our FAQs.
This article is an updated version of Fixed vs Variable Rates: What's The Difference? published by Katie Francis on 11 June 2021