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The first half of 2017 was a tough time for investors who were holding both cash and bonds. While they’re not due for returns until 2019, those returns have been slim over the last decade. Ben Domensino explains why.
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Variable Versus Fixed Rate Student Loans
Variable vs. Fixed rate student loans
Variable rate student loans are often confused with fixed rate student loans. While they both have interest rates that are variable, each type of loan has its own unique advantages and disadvantages. These loans offer many benefits, including less risk, flexibility, and lower costs. However, if you need additional funds, fixed-rate student loans may be the best option.
Benefits of variable vs. fixed rate student loans
If you’re considering a variable-rate student loan, keep these advantages in mind:
? Flexibility – You’ll have more freedom with variable-rate loans than with fixed-rate ones
? Lower fees – Most financial institutions charge higher fees for fixed-rate loans than for variable-rate loans
? Less risk – As long as your lender keeps making payments on time, you won’t lose any money on your student loan
Disadvantages of variable vs. fixed-rate student loans
While variable-rate student loans do provide some benefits over their fixed-rate counterparts, there are drawbacks associated with them as well. Here’s what you should know about them:
? Higher initial cost – The interest rate for a variable-rate loan starts at a higher amount than for a fixed-rate one, and it stays high throughout the duration of the loan. To get the lowest possible interest rate, you could pay for several years before taking out the loan
? More likely to default – If you miss a payment on a variable-rate loan, the bank may increase your interest rate or even withdraw the loan. On the other hand, missing a payment on a fixed-interest loan may not lead to any penalties
? Lender may reduce payment options – A lender may limit your choices of repayment terms, such as paying back a larger percentage each month or extending the length of the term
So, while variable-rate loans can help you save money, you still have to think carefully about whether the benefits outweigh the risks.
Variable Versus Fixed Rate Student Loans
Variable rate versus fixed rate student loans
Fixed-rate loans have been around for decades, since they were first introduced in the late 1970’s. Since then, the interest rates have remained relatively constant, meaning that borrowers never pay any additional fees to their lender. However, variable-rate loans have become increasingly popular over the past decade. When these types of loans were first created, the intention was for them to act as an incentive for people to go back to school and earn degrees. However, things changed after the housing market crash, which caused many students to lose their jobs and/or had trouble finding employment. As a result, borrowers began taking out bigger loan amounts than before.
Nowadays, a majority of college graduates take out variable-rate loans instead of the traditional fixed-rate loans, because they make sense financially. Borrowers who get a fixed-rate loan are tied down to paying high interest rates for years on end. On the other hand, borrowers who receive a variable-rate loan know exactly what their monthly payment amount will be, plus they don’t have to worry about having to refinance later on.
What is variable versus fixed rate?
A variable-rate loan is one where the interest rate changes based on certain criteria. These criteria may include how well the borrower is doing compared to others, whether he/she is making payments on time, etc. Interest rates for variable-rate loans change periodically throughout the year. Borrowers are able to see what interest rates they would be charged if they borrowed money right now. In addition, lenders do not need to preapprove loans and borrowers only have to fill out one application. The downside to variable-rate loans is that lenders aren’t committed to giving consumers a specific percent APR for a set period of time. If they choose to offer a lower interest rate, they could potentially charge higher rates at some point in the future.
How does a variable-rate work?
If you decide to borrow $10,000, a variable-rate works much like a credit card. Your lender will calculate how much you’re going to owe each month, depending on your debt level and current interest rates. Then, the lender will tell you what percentage of the total sum will be applied toward principal (that’s good) and what percentage will be added to your interest bill (bad).
For example, let’s say you took out a $10,000 loan with a 6% APR. You’d pay $600 per month in interest charges, minus whatever portion of the loan was being paid off each month. That means you’d spend $700 extra a month than if you got a 1% APR fixed-rate loan for the exact same amount.
Why should I consider getting a variable-rate loan?
First, a variable-rate lends is a great way to save money if you have poor credit. If you have bad credit, chances are you’ll get approved for a low fixed-interest rate loan. Because variable-rate loans tend to fluctuate in interest rates, you won’t be locked into a long-term contract if you don’t want to be.
Second, a variable-rate loan may be cheaper than a fixed-rate loan in the short run because you may qualify for a lower initial interest rate.
Third, you will likely pay less in interest charges over the course of your loan term.
The final consideration is that you may be eligible for a lower interest rate for a longer period of time.
What are the disadvantages of a variable-rate loan??
Variable Versus Fixed Rate Student Loans
This video explains the differences between fixed rate vs variable student loans. Mr. Zervos, owner of City National Bank, gets into the nitty gritty explaining how these loans work and what they mean to students. Make sure you watch this video if you are looking to go to college.
Mr. Zervos wants to remind consumers of two points! First, get good federal loans (student loan) at 8% and then look into consumer credit products after you graduate to help pay back your debt. Second, make sure you update your credit rating. If you have bad credit, obtain a secured card instead of using unsecured personal credit cards for purchases.
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Variable Versus Fixed Rate Student Loans
The Variable rate loan is much easier to get approved for, but it comes with many disadvantages. First off, variable interest rates are not set in stone. They are based on current market conditions, which means they constantly fluctuate throughout the year. If you miss out on qualifying for a fixed rate before the end of the month, you may have to pay a higher interest rate than if you had applied at the beginning of the month. Also, variable loans often have high origination fees. For example, some schools charge students between $300-500 just to apply for their loans.
The fixed rate loan is pretty difficult to get approved for, as it is considered riskier. However, you do not have to worry about paying high origination fees or having a variable interest rate because you know what your monthly payments will be for the duration of your student loan. In addition, you will only have one payment per month instead of two separate ones (one for principal and one for interest).
If you decide to go with a fixed rate loan over a variable rate loan, you need to make sure you have enough money saved up to cover any late fees your school might impose. You should also take the time to look into the best options for repayment plans. There are several different options for repayment and each one has its pros and cons.
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- Studentaid.gov/understand-aid/types/loans
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- Money.usnews.com/loans/personal-loans/personal-loans-for-students
- Credible.com/blog/student-loans/personal-loans-for-students/
- Govloans.gov/categories/education-loans/
- Forbes.com/advisor/student-loans/best-private-student-loans/
- Navyfederal.org/loans-cards/student-loans.html
- Wellsfargo.com/goals-going-to-college/loan-options/
- Whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/
- Ed.gov/category/keyword/federal-student-loans
- Myfedloan.org/
- Navient.com/
- Usa.gov/student-loans