Variable rate personal loans – Get flexible repayment terms
A personal loan with rate ups and downs might be worrying or exciting depending on how you look at it. But, when it comes to variable rates, it’s all about taking a calculated risk so you can lock in a potentially bigger payoff. Our guide on variable rate personal loans gets all your ducks in a row so you can decide if this option is worth a gamble.
What’s a variable rate personal loan?
Rather than stick to the same path, a variable interest rate tends to veer off course in either direction over the life of your loan. In the best-case scenario, this allows you to cash in on any rate cuts, which translates to lower monthly payments.
However, when rates take a dive, they usually surface and start climbing, which leaves you with an expensive financial product. This explains why variable rates are also called adjustable rates. Not only is the interest rate subject to change, but you may also need to keep fiddling with your budget throughout the repayment process.
What makes the interest fluctuate?
A variable rate never truly rests because it bounces off the Reserve Bank cash rate, which in turn, springs off the Australian economy. The cash rate is the official interest rate paid by banks when they borrow money, and if the economy is on the up and up, the Bank of Australia will lower the cash rate. But if the economy is far from booming, the cash rate increases to make borrowing costlier.
If you choose a variable rate, most financial institutions will pass on these extra costs and cuts down to you, though it’s not mandatory. Also, when it comes to increases, variable rates generally have a cap. Therefore, your interest rate won’t rise above a certain point when market rates are not doing so well.
How do personal loans with variable rates work?
Besides a rate that won’t stay still, here’s what you’ll also deal with when taking out a variable rate personal loan:
- Minimum and maximum limits. The bracket for loan amounts ranges from $1,000 to $5,000 while loan terms are between one and five years.
- Secured/Unsecured. This depends on whether you have a high-value asset that you want to use to guarantee the loan. A secured personal loan uses this asset which can be a car or property to lower the lender’s risk. That way the lender has something to hang onto if you default which explains why this arrangement generally fetches a lower interest rate. However, you can also choose an unsecured personal loan, a collateral-free option that comes with a higher interest rate on account of a significant lender’s risk.
- Early repayments. Variable rate loans usually go hand in hand with the flexibility to make extra repayments. That means when market rates are temptingly low, you can opt for a variable rate loan and pay it off in a rush before any increases if you want. This is handy because taking a quick exit from your debt is one of the top tricks for avoiding more interest payments.
Variable rate vs fixed rate personal loan
It’s understandable if a variable rate loan might not suit you or if you don’t like leaving your budget exposed to market forces. Luckily the menu for interest rate types also comes with fixed rate personal loans. These allow you to lock in the same rate over the entire loan term.
Although you’ll get the benefit of same-size repayments, fixed rate loans also come with downsides you’ll need to explore before reaching a decision. Check out BestFind’s fixed rate personal loan guide to get the rundown you need.
Pros of choosing a variable rate
- You’re more likely to get a lower starting rate than with fixed options
- When interest rates drop, you can enjoy lower repayments
- You can pocket more interest savings by erasing your debt before rates start rising
Cons of choosing a variable rate
- If the rate rises, you’ll have to blow up your budget to cover the increase in repayments
- It can be a hassle trying to match your budget to the many changes of a variable rate
- It’s difficult to place a hard figure on what the total cost of the loan will end up being.
When should you take out a variable rate personal loan?
As mentioned earlier, a variable rate is a good bet if well-timed. In most cases, that means the following circumstances have to align for it to be worthwhile:
- You’re choosing a short loan term. If you’re on a plan to quickly clear your outstanding balance, it means you can avoid the sting of rate increases.
- Market rates are on a downward trend. Generally, experts will predict how the cash rate is set to behave over the next few years. If interest rates are marked for a decrease, nominating a variable rate might be a better option.
- You have extra room in your budget. Rates can still jump unexpectedly, so make sure your budget is flexible enough to accommodate more outgoings.
How to compare variable rate loan options
When comparing variable rate personal loans, our product table will keep you tuned into Australia’s top options. However, there are a few things to look at before tagging an option that’s right for your financial situation:
- Interest rate. You’ll be comparing starting rates since the interest rate might change over the loan’s life. The lower the advertised rate, the more you pocket.
- Comparison rate. Alongside the advertised rate, the comparison rate also deserves some attention and for a good reason. It includes the interest rate and other standard loan fees and charges. Therefore, it carries more weight if you need to quickly calculate the true cost of the loan. If you’re looking at individual fees, common ones to check for include upfront establishment fees, monthly fees and late repayment fees.
- Monthly repayments. The size of your repayments is a crucial factor that can make or break your budget. To make sure you choose what’s best for your financial situation, use our variable rate personal loan calculator to find a good starting point for your monthly repayments.
- Extra repayment penalties. The best variable rate personal loans have no early exit fees. This allows you to pay off your loan quickly without having to deduct some of your savings to cover the penalties.
- Redraw facility. With a redraw facility, any extra repayments you make are not closed off from you. Instead, you can dip into this surplus when you need to, though you should always watch out for redraw fees.
- Other beneficial features. The best variable rate personal loans also come with extra merits, such as the flexibility to choose weekly and fortnightly repayments. Some lenders offer same day funding, while others let you manage your loan online.
How to apply for a variable rate personal loan
Applying for a variable rate online begins with one click on the “Go to Site” button of your choice. This takes you directly to the credit provider’s website where you’ll need to meet the following requirements:
- Be an Australian citizen or permanent resident who’s 18 years and above
- Have a stable and sufficient income
- Provide ID and proof of payment documents
- Provide details about your contacts, employment and finances
Variable rate personal loans FAQ
What can I use a variable rate loan for?
You might need to check with your lender, but generally, you can use the funds for most purposes, including debt consolidation.
Can I refinance a variable rate loan?
Yes, it’s possible to switch to a fixed rate personal loan if interest rates get out of hand.
How do I get the lowest rate when choosing a personal loan?
At the very least, shop around and compare loans, check your credit profile to make sure all is in order, and don’t be afraid to negotiate with the lender.
Can I apply if I have bad credit?
Yes. However, most bad credit personal loans are usually secured loans.
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