What's the Difference Between Fixed and Variable Interest Rates?
Each Wednesday, MEFA will feature a Word of the Day where we'll highlight a word or phrase related to the college planning process. We're focusing on vocabulary related to college loans, and will highlight words you may come across on your loan application, solicitation disclosure, or a lender's website.
For today's Word of the Day, we're distinguishing between two types of interest rates.
Fixed vs Variable
A Fixed Interest Rate will not change during its term, so the monthly payment on a loan with a fixed interest rate will remain the same for the life of the loan.
A Variable Interest Rate will change during its term, based on market conditions, so the monthly payment on a loan with a variable interest rate, and the amount of interest accrued on the loan, will fluctuate (go up or down) throughout the loan's lifetime.
Why does this matter?
As a borrower, it is always important to be clear on the terms of your loan. Understanding your loan's type of interest rate is critical for both short-term and long-term planning. Many people prefer the stability of a fixed interest rate, allowing them to budget for now and the future, as the monthly payment and interest will remain the same until the loan is paid off.
Some borrowers prefer the lower rate that may come with a variable rate loan. However, when considering this interest rate, it is important to think long term. As interest rates rise, perhaps in three years or five years, the monthly payment on a variable rate loan will also rise. Borrowers of variable rate loans must be sure their budgets can handle a potential increase in monthly loan payments. In some cases, loans with a variable rate have no cap on how high the interest rate can rise.
Being a wise borrower means looking beyond just the rate and the short term payments, and making an informed decision about what is best for the family, not only for today but for the future as well.
To learn more about MEFA's straightforward and competitive loan rates and terms, visit mefa.org/loans.