The fixed rate loan allows you to better know what your loan will cost you, both on the total credit and on the amount of the monthly payments. It allows you to know how long the reimbursement will be made. In short, a fixed rate allows you to precisely anticipate each element of the loan.
Fixed rate and variable rate: reminder of the differences
The stability and forecasts that a fixed rate allows are what differentiate it from the variable rate, which decreases or increases according to a benchmark index chosen by your bank. All the criteria mentioned above are therefore unpredictable in the context of a variable rate.
Very simply, the interest of a variable rate rests on the fact that if the benchmark index decreases, your credit will be cheaper. But a loan signed with a variable rate also works the other way around and can cost you more depending on market developments. The other advantage is to benefit from a lower rate than a fixed rate at the time of subscription.
The benchmark chosen by your bank is very likely to be interest rate: it is the interest rate at which financial organizations lend themselves money in the short term. Beware of lenders taking indices from foreign currencies as a reference.
The choice of the type of rate depends mainly on the context
The choice of a variable rate is justified especially when the fixed rates are high and called to fall in the years following the signing of the loan. If you want to borrow at variable rates today, know that fixed rates are still low. Given the current rate environment, the only scenario in which this type of rate can be advantageous is short-term borrowing with the certainty of not encountering repayment difficulties whatever the rate. You must therefore present an excellent dossier to your banker.
In the context of a variable rate loan, you must always make sure that you do not allow yourself to be overwhelmed by changes in the rate. To do this, clearly define with your banker the rate cap: the rate may vary but within a certain limit, whether it is upward or downward. So, you can hope to limit the fluctuation to 1% difference with the rate obtained when signing the loan.
Remember that the choice between fixed rate loan and variable rate loan is based on the level of current rates. Currently, the fixed rate is much more advantageous for the majority of borrowers with its low level!