Ask These Questions When Considering a Variable Rate Loan
This is the old option: fixed or floating rate . With fixed rates, you can lock in a decent price. By using variable rates, you can take advantage of a better price, but this price is subject to change. A fixed rate seems like a win-win, but if you’re taking a little risk, here’s what you should consider before settling on a variable rate.
CommonBond writer Caitlin Butler specializes in fixed rate and variable rate loans. But it is not only loans that offer variable or fixed rates. Your electricity rate, credit card interest, and even your cable TV package may offer a fixed or variable option. And some of Butler’s advice applies to any fixed and variable scenario. She points to three important questions to ask a lender or other service provider before agreeing to a variable rate:
1) What market benchmark are you using? Once you get that benchmark, visit a site like the Wall Street Journal Data Center or Bankrate to understand its past and recent performance, and see what experts predict what the course will do next.
2) How often can the rate change? For example, can you adjust your rate every two weeks, month, or year if the markets change? Make sure you don’t run into any surprises when it comes time to make payments.
3) Do you have a maximum bid? This is an important defense for you, so if the market rises quickly, your rate cannot soar above a certain point. (You should seriously consider avoiding lenders who don’t offer you the maximum rate.)
This solution still requires a little more thought, but these questions will at least point you in the right direction. It also offers some insight into how variable rates are calculated, so be sure to check out the full article.