Variable Rate Personal Loan

What is a variable rate personal loan?

A variable rate personal loan is a loan that has an interest rate that will change to reflect the current lending trends. This means that your interest rate may rise and fall during your loan. Interest rates are set by the Reserve Bank of Australia (RBA), and they make the decision based on many different factors, including how the Australian economy is working. As the interest rate on your loan may change, it can mean that your repayments may increase or decrease. However, a variable rate personal loan usually has a lower interest rate when compared to a fixed interest rate loan.

When you're considering a variable rate interest loan, you'll need to decide if the lower interest is worth the risk of interest rates increasing during the loan term. There is a reduced risk with short term loans because you'll often have them paid out within five years. A variable interest rate loan is a larger risk for longer loans, such as a standard 30-year mortgage. If you're not sure if a variable rate is right for your needs, then you can check current financial forecasting from the RBA to see if they are considering raising their interest rates in the future.

What are the advantages of a variable rate personal loan?

As with all fast cash loans, there are pros and cons based on the type of loan you're looking at. To make an informed choice, you'll need to look at each loan and consider which is best suited for your personal needs. With a variable rate personal loan, the main benefit is that you'll be offered a lower rate when compared to a fixed rate loan. If you feel that the interest rate will not increase during the loan's lifetime, then you can save on your overall interest rate payments. Another benefit is that your interest rate will usually change if the interest rate decreases. When the interest rate decreases, you'll end up saving on your monthly repayments, or you can keep up the existing monthly payments and pay off your loan faster. 

With some fixed rate personal loans, you cannot make additional payments or pay out the loan early because your interest is predetermined for the loan's lifetime. With a variable rate personal loan, there are no penalties or fees associated with paying out the loan early or making additional payments when you can. This offers you a lot of flexibility, especially if you work regular hours, with the option of picking up extra shifts when you can!

Is a variable rate personal loan risky?

Risk is a relative term but making sure you completely understand the terms of any loan is your best method for alleviating any risk. For example, one of the main disadvantages of a variable rate personal loan is that the lending interest rate may increase, and in that case, you'll need to pay more each month. However, if you factor in this possibility, it is best not to overextend yourself and make sure you only borrow what you can comfortably afford.
While a variable rate is riskier than a fixed interest rate, with cash loans of less than 3 to 5 years, you can be reasonably confident that interest rates will not increase excessively during your loan. However, if you'd prefer not to worry about changing interest rates (which are usually out of your control), then a fixed rate can often be better. In addition, a fixed rate loan allows you to better plan out your budget as you'll know precisely how much you'll be paying each month.
An excellent way to help you decide is to look at any recent changes to the interest rate from the RBA. If the rate has consistently been going down over a few years, you can comfortably predict it will rise soon. The RBA regularly makes media releases about how they see the Australian economy running in the next six months or more. These are reasonably reliable in predicting interest rate rises or falls. Of course, the personal loans you choose are totally up to you and what you feel most comfortable paying.