Flickr user Roger Smith
In variable rate loans, the rate of interest fluctuates and changes several times over the lifetime of the loan. This is because variable rate loans are tied to market interest rates.
Variable Rates and Market Trends
When market conditions are bad, lenders reduce short-term interest rates to encourage lending. When this happens, the rate of interest on variable-rate loans get lowered too.
When the economy is on an upward trend, the lenders raise interest rates in an attempt to prevent the sharp increase in prices. When this happens, variable-rate loans get raised too.
How Often to Variable Rates Change?
These market fluctuations can happen as often as every month or they may happen every quarter or annually. Accordingly, variable-rate loans will also change monthly, quarterly or annually.
Pros and Cons of Variable Rates
The downside of taking variable rate loans is the unpredictability of your monthly payments. You will not know for sure whether your next monthly payment will be more or less than the last payment.
On the other hand, the advantage of taking a variable student loan is that you start out with a lower rate of interest at the outset. If market continues to perform badly, interest rates will continue to stay lower than the rates on fixed-rate loans so you benefit from a lower overall payment.
