Fixed Rate Vs. Variable Rate Interest

When applying for a loan, you may be given the option of choosing either a 'fixed rate' or a 'variable rate' loan. The fixed interest rate will stay the same throughout the loan repayment period whereas the variable interest rate is influenced by changes in the economy (see The Effect of the Economy on Interest Rates) and in the lender's own standard interest rates.

Fixed rate loans are advisable when interest rates are low and are set to rise. Variable rate loans may be preferable if interest rates are high because if they do drop, you will end up paying less interest on your loan. It is always safer to plan for the 'worst case scenario' so that you are not left vulnerable to adverse economic conditions. It is normally better for the purposes of managing your finances to apply for a fixed rate loan, which enables you to plan how much you need to set aside for your loan repayments each month.