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Should You Use A Floating Rate Personal Loan?

Posted by : Premraj | Posted on : Monday, August 20, 2018

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Saving for rainy days is a safe way to be prepared for any unforeseen emergencies. Otherwise, you might potentially find yourself in tricky situations if you cannot offset the costs that an unexpected emergency comes tied with. Unfortunately, sometimes having rainy day savings isn’t enough, and applying for a loan can be the best alternative.

Luckily, with the rate at which lenders compete for borrowers nowadays, it can be quite easy to land a personal loan at a favorable interest rate. While landing a loan might seem easy, choosing between the different loan options and policies can be baffling. One choice that leaves most borrowers in a dilemma is the choice between floating and fixed rate loans.

Here’s a guide to help you make an informed choice:

Fixed Vs. Floating Loan Rates

The lending industry has evolved to the point that lenders can offer you easy approval installment loans for bad credit, but the trick comes in the type of rate that they can offer you. Fixed rate loans have a predetermined rate that remains the same throughout the life of the loan. The only time that the rate can change is if you were to refinance the loan.

Floating rates tend to be the complete opposite. You will first start with a specified percentage as your current rates which will change with time throughout the life of the loan. The rate can either go up, down or stagnate depending on a variety of factors.

What Type of Loans Encourage Floating Rates?

Most loans will tend to use a fixed interest rate, but they also give room for floating rates. For instance, in mortgages, the floating rate option is called an adjustable rate mortgage (ARM). Some personal and business loan lenders might also allow floating rates. Either way, the concept is that the rate of all allowed loans will change to adapt to the current market interest rates.

Why Use A Floating Rate?

Lenders typically include a prepayment penalty in loan policies that govern fixed rate loans. This means that you cannot pay your loan in a lump sum without paying off the fine. On the other hand, loans that have a floating interest rate allow the user to pay off a lump sum of the loan at a go.

When the current market interest rate is doing great, the borrower wins. This means low rates which result in reduced monthly payments. Combining the factor of reduced monthly payments and no prepayment penalty simply means that a borrower can pay down the loan quite easily, especially when the market rates favor them.

Why Stay Away From Floating Rates?

The fate of your loan repayment amount lies solely in the hands of the current market trends. If interest rates were to increase suddenly, then you will have to make bigger monthly payments. While there are cases when the rate is close to the relative fixed rate loan, in other cases, the rate will soar higher than the fixed rate loan.

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