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Choosing between a fixed rate and variable interest rate home loan is a question that can stump not only home buyers, but financial experts as well. The advantages and disadvantages of each option should be weighed up carefully before a decision is made, as the wrong decision can turn out to be costly.
The interest rates on variable home loans are influenced by market conditions and the base rate. This means that the interest rate on your home loan can increase and decrease as the market fluctuates during the term of the loan.
As seen in recent months, the Reserve Bank can choose to cut interest rates if it is believed to be beneficial to the economy. These cuts are good news for those with variable rate home loans as long as your provider chooses to pass on the cut. On the other hand, when interest rates go back up, the interest rate on your home loan will also increase.
Choosing a fixed rate home loan means you can lock in a certain interest rate for one, two, three, four or five year terms. The interest rate on your home loan will stay the same regardless of market conditions for the length of the term. At the end of the term, you can choose to switch to a variable rate or lock in another fixed rate term.
Fixed rate home loans can give home owners the security of knowing the interest rate on their loan will never rise, but at the same time, they will not benefit if interest rates drops. If you decide to repay part or all of your home loan during the fixed rate period you may be required to pay fees to do this, which can be quite costly. This will depend on how much you want to repay, and whether current interest rates are higher or lower than the rate you are currently paying on your loan.
Weighing up your Options:
When you are choosing between fixed rate and variable home loans, you will need to take into account the current state of the economy and where you think the economy is heading. Also think about whether it's likely you will want to make higher repayments on your loan in order to pay it off more quickly. For such an important decision you should read as much information as possible and speak to everyone you can, such as mortgage brokers (often for free) and a financial adviser.
In some cases, you can have the best of both worlds by choosing a split loan. With a split loan, you are able to divide your home loan into two parts: one part fixed rate and one part variable. This means you can have the security of knowing the interest rate on the fixed rate loan will not change, while still being able to take advantage of interest rate decreases and the ability to make larger repayments on the variable loan.
Personal loans can be used for any number of things. Common purposes are buying a new car or boat; if you're getting married or planning a holiday; if you want to do some home repairs or if you want to consolidate your debt, a personal loan could give you the means to do it.
Secured vs Unsecured Loans
A secured loan means that repayment of the loan is secured against some sort of asset, often the purchase itself - such as the car purchased by a car loan. If the loan is repaid as agreed the lender can claim ownership of the asset as repayment. This use of the assety means the lender is less at risk and therefore will often charge a lower interest rate on repayments.
Unsecured loans are not secured against assets posing a higher risk to the lender and therefore a likely higher interest rate.
Fixed Rate versus Variable:
You can choose a personal loan with fixed rate or variable rates of interest. On a fixed rate personal loan, the interest rate will be fixed and will not be affected by market fluctuations. On a variable personal loan, the interest on the loan will vary depending on the current interest rates and will be decided upon by your loan provider.
Each option has advantages and disadvantages, and you will need to research the current economic climate and decide which option will work best for you.
Some Tips on Choosing a Personal Loan:
Be honest on your loan application: don't lie about your financial situation, your provider will be able to provide you with the best option for your situation.
If you are self-employed it may be more difficult to get a loan approved. To make yourself more attractive to lenders, provide as much financial documentation as possible to prove the worth of your business, and make sure you keep a good credit history.
Different lenders can provide better deals for various reasons, so make sure you shop around to get the best one for you. This can also be the best choice for borrowers who are self-employed, new to the country, or have poor credit history. Interest rates can be higher on these types of loans, but in some cases may be reduced after a few years of reliable timely payments.
Check your application for errors:
If your personal data has been entered incorrectly on the loan application, it can mean you receive the wrong rate of interest. Keep an eye on ongoing statements to ensure mistakes are not made during the term of your loan.
When you are applying for a loan, you can have the option of choosing between a secured and unsecured loan. If you apply for a secured loan, you will need to commit an asset to be used as collateral against the amount of the loan. If you choose the unsecured loan option, no collateral is required.
The asset to be used as collateral will depend on the type of loan you choose, the loan provider, and the amount of the loan. If you apply for a car loan then the car may be used as security. If you apply for a personal loan, then the lender will usually prefer property to be used as collateral. You may be able to negotiate terms with your loan provider, but make sure you investigate all options to make sure you get the best deal to suit you.
Securing your loan with some sort of collateral makes your loan application less risky to lenders. You are more likely to be approved for a loan that is secured rather than unsecured. You are also more likely to receive more favourable interest rates and repayment options on the loan.
As with any financial decision, make sure you read all terms and conditions attached to the loan. Ask your lender to clarify any questions you have, and if there is anything you still do not understand, ask the advice of an impartial expert.
Make sure you are able to make the required payments to pay back the loan. Take a serious look at your current financial situation, and what your finances will be like over the length of the loan. If you think you may not be able to make repayments, then it may be best to re-think the loan amount or the length of the term.
If you default on a secured loan, then you will lose the collateral you placed against the loan. Depending on the terms of the loan, the loan provider can take possession of the collateral and sell it to replace the money lost on the loan. If the item does not cover the amount the lender has lost, you can be taken to court to ensure you pay back the difference.
This will also have a negative effect on your credit rating, making it much more difficult to obtain credit in the future.
Taking out a loan can be a risk. You are agreeing to pay a certain amount on a regular basis, for a lengthy period of time. No one is entirely sure of what their future holds and how their finances will be affected. By taking out insurance on a loan, you are able to insure against the worst happening by protecting yourself if you are unable to make repayments.
Different providers offer different options for loan insurance. There are options to suit all requirements and budgets, so check all options thoroughly to make sure the product you choose is best for your needs. Also make sure you read through all terms and conditions, and be clear on what you will receive as well as what is expected of you.
Insurance can provide protection against a number of possibilities. It can cover your loan repayments if you become injured or you are too sick to work, or if you lose your job. Some insurance will provide death payouts, which will repay the balance of the loan up to a certain amount, should you die before the end of the loan term. Depending on the insurance provider, you can also choose to have premiums included in the amount that you borrow.
Planning for an unknown tomorrow can often be the best option when you are committing yourself to a loan. If you are unable to make repayments and you do not have insurance to cover them, then the loan provider may take action against you. This means your property or home can be confiscated, you can be taken to court, and your credit rating can be affected.