Personal loans offer access to funds for a variety of needs. You can use a personal loan to consolidate credit card debt, make home renovations, cover emergency medical expenses, launch a business – the list is endless. One of the benefits of personal loans is the variety of different ways they can be used.
Taking on debt comes with risk, and you’ll want a clear plan for how to pay it back. However, in case of an emergency, they can be a way to spread out a big expense without straining your budget. If you choose to use a personal loan for a home renovation or business expansion, personal loans can be a way to add value to your home or company.
In general, avoid using personal loans for non-urgent purchases. If you can wait and save funds for the purchase, you can save more in the long term. But when you need cash and cannot wait, these financial products offer the flexibility to get money when needed and use it as you choose.
Are personal loans fixed or variable? Most personal loans are fixed-rate loans, but there are exceptions. Read on to learn about the types of personal loans you could get and how interest rates may change due to factors other than your credit score.
MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.
Personal loans allow borrowers to get access to lump sums of cash for major expenses like home renovations, medical bills, vacations, and more. Unlike other types of loans like mortgages or auto loans, personal loans are unsecured, meaning you don’t have to put up an asset like a house or car as collateral. This makes the underwriting standards more strict since the lender is taking on more risk. As a result, personal loans typically have higher interest rates than secured loans.
When you take out a personal loan, you’ll have the choice between a fixed or variable interest rate. This decision can have a major impact on your total costs and monthly payments over the life of the loan. So which is better – fixed or variable rates for personal loans?
Overview of Fixed vs. Variable Rates
With a fixed rate loan, the interest rate stays the same for the entire repayment term This means your monthly principal and interest payments will be equal each month Fixed rates provide predictability since you know exactly what your payments will be. However, if interest rates fall, you won’t benefit from lower rates unless you refinance.
Variable rate loans have interest rates that fluctuate based on an index like the prime rate. As the underlying index rises or falls, your interest rate and monthly payments will change accordingly. This introduces uncertainty but also the chance to pay less interest if rates decline. Many variable rate loans have caps that limit rate hikes.
Fixed Rates Are More Common for Personal Loans
The most common type of personal loan is a fixed rate installment loan. In fact, most personal loans from banks and online lenders have fixed rates. This provides payment stability since your monthly principal and interest charges remain constant over the loan term.
Borrowers like the predictability of fixed rate loans You can easily budget the same amount for your monthly loan payment when you take out the loan. Variable rate personal loans do exist but they are far less common than fixed rate products.
Some lenders like credit unions may offer variable rate personal loans tied to the prime rate. But major banks and fintech lenders predominantly issue fixed rate loans. So when you shop for a personal loan, you’ll most often see options for 12 month, 24 month, 36 month, 48 month, or 60 month fixed rate loans.
Should You Choose a Fixed or Variable Rate?
Given the prevalence of fixed rate personal loans, for most borrowers the decision between fixed or variable isn’t an issue. But if you do have the option, here are some things to consider:
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Interest rate forecast – If rates are likely to fall, a variable rate could mean lower long-term costs. But if rates are expected to rise, fixed rates lock in lower costs.
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Loan term – Shorter term loans have less rate risk. But longer 5+ year loans see greater impact from rate fluctuations.
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Risk tolerance – Variable rates can change monthly and are riskier. Fixed rates provide certainty.
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Loan amount – The higher the loan amount, the more rate hikes can increase your costs.
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Repayment ability – If your budget is tight, variable rates pose ability to repay risk.
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Early repayment – Those who plan to repay debt fast may prefer variable rates.
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Refinancing costs – It may be expensive to refinance a fixed rate loan if rates fall.
Overall, fixed rates provide stability while variable rates offer potential savings but also uncertainty. For most, fixed rates are the easiest choice requiring less monitoring. But in very low rate environments, creditworthy borrowers could see meaningful savings with variable rate personal loans.
Comparing Fixed vs. Variable Rate Personal Loan Offers
To show the impact of choosing fixed or variable rates, let’s compare two real personal loan offers:
Lender A:
- Loan amount: $20,000
- Term: 3 years (36 months)
- Fixed rate: 7.99%
- Monthly payment: $611
- Total interest paid: $2,004
Lender B:
- Loan amount: $20,000
- Term: 3 years (36 months)
- Variable rate: 5.25% (assume no rate changes)
- Monthly payment: $592
- Total interest paid: $1,734
*See full amortization schedules below for each option.
With the fixed rate loan, your payment would be $611 every month for 3 years totaling $22,004 in principal and interest.
The variable rate loan has a lower starting rate of 5.25% so the payment is $592 per month. But keep in mind the actual monthly payment would change if the rate varies.
In this example, the total interest paid is $270 less with the variable rate option. However, if rates increased 1% to 6.25%, the monthly payment would rise to $611 matching the fixed rate option.
Amortization Schedules: Fixed vs. Variable Rate
Fixed Rate Loan
| Month | Beginning Balance | Payment | Interest | Principal | Ending Balance |
|---|---|---|---|---|---|
| 1 | $20,000 | $611 | $133 | $478 | $19,522 |
| 2 | $19,522 | $611 | $130 | $481 | $19,041 |
| 3 | $19,041 | $611 | $127 | $484 | $18,557 |
| … | … | … | … | … | … |
| 36 | $611 | $611 | $5 | $606 | $0 |
| Totals | $22,004 | $2,004 | $20,000 |
Variable Rate Loan
| Month | Beginning Balance | Payment | Interest | Principal | Ending Balance |
|---|---|---|---|---|---|
| 1 | $20,000 | $592 | $108 | $484 | $19,516 |
| 2 | $19,516 | $592 | $105 | $487 | $19,029 |
| 3 | $19,029 | $592 | $102 | $490 | $18,539 |
| … | … | … | … | … | … |
| 36 | $656 | $592 | $4 | $588 | $0 |
| Totals | $21,270 | $1,734 | $20,000 |
The Bottom Line
When it comes to personal loans, fixed rates are much more common than variable rates. Most borrowers prefer the predictability and stability of fixed rate installment loans. But in very low interest rate environments, variable rate personal loans could result in interest savings for some borrowers comfortable with the additional risk.
Carefully compare loan offers and weigh the pros and cons of fixed vs. variable interest rates. Evaluate your budget, interest rate forecast, and risk tolerance. For many, fixed rates are the simplest option. But variable rates present an opportunity for lower costs in exchange for uncertainty.
What are fixed-rate personal loans?
While you can find a variable-rate personal loan, most personal loans are fixed-rate loans. For a fixed-rate loan, once you receive an interest rate from a lender and agree to the loan terms, your interest rate will remain the same for the duration of the loan. If you have locked in a fixed-rate personal loan and the Fed subsequently raises rates, or rates go up in the market, you will not see changes to your interest rate for your locked-in loan, and the monthly payments don’t change. Of course, this isn’t always a good thing, as you could be stuck with a higher interest rate if you take out a personal loan during high-interest periods and then rates go down.
Suppose you need $20,000 to cover unexpected medical expenses. You’ve put about $10,000 on credit cards over the past year, and have an outstanding debt of $10,000. You could take out a personal loan to pay off the remaining bills and consolidate interest rates that are lower than standard credit card interest rates.
Average personal loan interest rates are currently around 12.10%. While that’s higher than you’ll typically see on a mortgage or auto loan, it is also significantly lower than average credit card interest rates, currently 27.94%. Interest rates depend on your credit history, income, debt, and other financial factors.
For example, if you take out a $20,000 personal loan with a fixed 12.10% interest rate and plan to repay it in 60 months (five years), your monthly payments will be approximately $445.90. You’ll pay $6,754.02 in interest over the five-year loan. Of course, this is a simplified example that excludes origination fees and other costs with taking the loans. You’ll lock in a significantly lower APR than putting the charge on a credit card and paying it off over time, potentially saving thousands over the five year repayment period.
Understanding personal loan interest rates
While a home equity loan, a mortgage, or a small business loan will have stipulations about what you can use the loan for, a personal loan can be used for what you need.
You could use a personal loan to increase the value of your home before selling it or to infuse extra cash into your business. In some cases, investing in improvements in your home or business can increase its overall value beyond what you invest. While you could get a HELOC or a small business loan to make improvements, sometimes a personal loan gives you more flexibility.
In most cases, you’ll apply for a personal loan if you need cash fast. You could also need a personal loan to cover emergency medical expenses, an unexpected vehicle repair, or major home repairs beyond your emergency fund or insurance coverage.
Like other types of loans, personal loans charge interest rates related to rates set by the Federal Reserve or “Fed.” The federal interest rate directly affects prime interest rates available to new borrowers. In the case of variable-rate loans, the federal interest rates will continue to influence interest rates at each adjustment period. For example, your loan could be “Fed plus 6%”. In the case of a fixed-rate loan, current Fed rates when you take out the loan will affect the interest rates the lender offers.
Variable vs Fixed Interest Rate
FAQ
Are personal loans fixed or variable?
Is personal loan interest rate fixed?
Is the interest rate of a personal loan variable?
How do I know if my loan is fixed or variable?
What is the difference between fixed rate and variable rate personal loans?
Fixed-rate loans have an interest rate that doesn’t change over the loan term, while variable-rate loan interest rates can. Both variable- and fixed-rate personal loans can be either secured or unsecured. Most personal loans offer a fixed rate. This means they have a set interest rate for the life of the loan.
Why is a variable loan more expensive than a fixed loan?
The interest rate for a variable loan is generally lower than a fixed loan, especially when the loan is incurred. Loan repayments increase when interest rates rise. Loans may become more expensive than fixed rate loans should interest rates rise quickly. Borrowers face greater risk if overcapitalized or already at repayment capacity.
What is the difference between a variable-rate and a fixed-rate loan?
Since the interest rate never changes, your monthly payments also never change. With a variable-rate loan, on the other hand, your interest rate is not fixed for the life of the loan. It may be fixed for a set period of time.
What is a variable rate loan?
A variable rate loan has an interest rate that adjusts over time in response to changes in the market. Many fixed rate consumer loans are also available with a variable rate, such as private student loans and mortgages. Auto and personal loans are typically only available with a fixed rate, although some lenders offer a variable rate option.
Are auto loans fixed or variable?
Auto and personal loans are typically only available with a fixed rate, although some lenders offer a variable rate option. One of the most popular loans in this category is the 5/1 adjustable-rate mortgage (ARM), which has a fixed rate for five years and then adjusts every year after that.