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Variable-rate personal loans
Variable-rate loans could give you flexibility to help pay off your debt faster — but with the risk of higher costs down the road.
Variable-rate personal loans tend to come with lower starting annual percentage rates (APRs) than their fixed-rate counterparts. But as its name suggests, the interest rate can vary — or change — throughout the term of the loan depending on market conditions. Read on to learn more about how variable-rate loans work, what the benefits are and what you’ll want to watch out for.
With a variable-rate loan, the interest rate you’ll pay will be based on a specified percentage plus or minus the prime rate. The prime rate is usually based on the Bank of Canada’s overnight lending rate and can fluctuate up or down based on economic conditions.
A variable rate can change over the course of your loan term, and usually starts out cheaper than a fixed interest rate, but it can potentially increase and be more costly a few years into your loan term. With a variable rate, your monthly payments will vary if the prime rate fluctuates.
Banks and credit unions are the main providers of variable-rate loans. As an example, the rate of TD’s variable-rate personal loan is 6.33% – 13.58%, while the rate of its fixed-rate personal loan is 8.83% – 16.03%.
Term length and loan amounts of variable-rate personal loans
Term lengths for variable-rate loans usually sit between 1 and 5 years, with some lenders offering terms up to 7 or 10 years.
Borrowing amounts typically range anywhere from $3,000 to $50,000, sometimes more. Depending on the lender, you may be able to make extra repayments or pay off the entire loan early without facing penalties.
A variable-rate personal loan can be either secured or unsecured. With a secured loan, you’ll need to provide collateral such as your home or investments.
Compare personal loans
Finder does not currently have any variable-rate loans. You may like to consider these fixed-rate personal loans instead.
One is not inherently better than the other. It all depends on your personal circumstances and current economic conditions.
Why you might consider it:
- Competitive rates. A possible lower starting interest rate is usually what attracts borrowers.
- Potential decrease in rate. When prime rates drop, you’re not locked into a fixed rate, letting you enjoy lower repayments and a cheaper overall loan cost.
Why you might rule it out:
- Interest rates are unpredictable. As the market fluctuates, so does your interest rate. If your rate rises, your monthly payment will also increase, and the loan may cost you more in the long run.
- Harder to budget for. Variable-rate loans are sensitive to economic conditions, and the interest rate of your loan will change over the duration of paying it off – making it harder to budget monthly repayments.
Consider these factors when comparing personal loans:
- Repayment flexibility. You should confirm the repayment flexibility of your loan before you apply. Will you be able to make additional payments or pay it off early without facing extra fees?
- Fees and charges. Check if there are any upfront or ongoing fees when comparing variable-rate loans, as they could significantly increase the cost of your loan.
- Total cost of the loan. You should consider how much the loan will cost in total. This depends on a few factors including how long the loan term is, payment frequency, interest and any other fees that come with the loan. Compare the APR of different loans to get an idea of the true cost.
What is an APR?
The annual percentage rate (APR) incorporates both the interest rate and fees to show you the true cost of a loan.
Costly mistakes to avoid
- Borrowing more than you can repay. Only borrow the amount that you actually need since you’ll be paying interest on the borrowed funds. Defaulting on any kind of loan leads to a negative mark on your credit file and if your loan is secured, you will lose your collateral.
- Extending terms longer than needed. A shorter loan term means you pay less interest — and the loan is ultimately cheaper — so you may want to consider choosing the shortest term that’s manageable on your budget. Some lenders might try to convince you to take a longer loan term and offer lower monthly payments as a selling point – but your loan will cost you more.
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While a variable-rate loan can save you money over the life of your loan, unexpected increases in the prime rate can send your interest rate far higher than a fixed-rate loan. Before applying for a variable-rate loan, compare your personal loan options to find the right one for your needs.
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