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Pros and cons of fixed interest rates

by , 02 October 2014

Interest rates can be our worst enemies. They're the main instruments by means of which banks make their money.

It's very important to understand the difference between fixed and variable interest rates before taking out a loan, so you can make an informed decision and avoid regrets.

This is especially true if you’re thinking of buying a home in the near future. You need to understand which type of loan will work in your best interest.
 
Fixed interest rates are determined at the moment the loan agreement is signed and are not supposed to change for the entire duration of the loan. The agreed upon rate is usually a bit higher (1.5% - 2%) than the current interest rate. A variable interest rate fluctuates over time on the basis of changes in economic factors.
 
The main benefit of a fixed interest rate is that you know how much you have to pay each month over the term of the loan.
 
The main disadvantage of a fixed interest rate is that if the interest rate drops, you will still have to pay the higher rate you agreed upon in the beginning, so you risk losing money.
 
The fixed interest rate is desirable if you can lock it when the market rates are at an all-time minimum.
 
To determine which type of interest rate is best, one must assess the individual circumstances and the future interest rate fluctuations. If interest rates are about to drop, then a variable interest rate would be advisable. If interest rates on the rise, then a fixed interest rate should be chosen.
 
Consult a financial planner who can advise you which type of interest rate is in your best interest.

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Pros and cons of fixed interest rates
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