When it comes to student loans there are two main types of interest rates: fixed and variable. So which one is right for you? The answer may depend on a number of factors including your personal financial situation and your plans for after graduation.
If you are confident that you will be able to make your loan payments after graduation a fixed interest rate could be a good option. This is because a fixed rate will not change over the life of your loan so you’ll always know how much your monthly payment will be. This can make budgeting easier and help you avoid any unexpected increases in your payments.
However if you are worried that you may not be able to make your loan payments after graduation or if you think interest rates may go down a variable interest rate could be a better option. This is because a variable interest rate will change along with market interest rates. So if rates go down your payments will go down. On the other hand if rates go up your payments will also increase.
Ultimately the decision of whether to choose a fixed or variable interest rate student loan should come down to your personal financial situation and your plans for after graduation. If you are confident in your ability to make your loan payments a fixed interest rate could be a good option. However if you are worried about your ability to make payments or think interest rates may fall in the future a variable interest rate could be a better option.
What is the difference between a variable and a fixed rate student loan?
A variable rate student loan has an interest rate that can fluctuate over time while a fixed rate student loan has an interest rate that stays the same for the life of the loan.
Which type of loan is best for me?
It depends on your individual situation.
If you think interest rates will go up over time a fixed rate loan might be a good choice.
If you are comfortable with some risk and think interest rates might go down a variable rate loan could save you money in the long run.
Will my monthly payment change if I have a variable rate loan?
Yes your monthly payment could go up or down depending on the movement of interest rates.
How often can interest rates change on a variable rate loan?
Interest rates can change as often as monthly but typically change once per year.
When do interest rates reset on a variable rate loan?
Interest rates typically reset at the beginning of each year.
How is my interest rate calculated on a variable rate loan?
Interest rates are calculated based on a benchmark rate plus a margin.
The benchmark rate is typically the Prime Rate or the London Interbank Offered Rate (LIBOR).
What is the Prime Rate?
The Prime Rate is the interest rate that banks charge their most creditworthy customers.
What is the London Interbank Offered Rate (LIBOR)?
The London Interbank Offered Rate (LIBOR) is the rate at which banks can borrow funds from each other on the interbank market.
What is the difference between the Prime Rate and the LIBOR?
The Prime Rate is the interest rate that banks charge their most creditworthy customers while the LIBOR is the rate at which banks can borrow funds from each other on the interbank market.
What is the margin on a variable rate loan?
The margin is the number of percentage points that is added to the benchmark rate to calculate the interest rate on the loan.
How is the margin calculated?
The margin is calculated based on the borrower’s creditworthiness.
Can the margin on my variable rate loan change?
Yes the margin can change over time depending on the borrower’s creditworthiness.
If the benchmark rate changes will my interest rate change?
Yes if the benchmark rate changes the interest rate on your loan will change as well.
If the margin on my loan changes will my interest rate change?
Yes if the margin on your loan changes the interest rate on your loan will change as well.
Can I choose to make payments on a variable rate loan that are different from the minimum payment?
Yes you can choose to make payments that are different from the minimum payment but the interest rate on your loan will remain variable.
