Variable rate loans can give you the flexibility to help you pay off your debt faster.
Variable rate personal loans come with fewer repayments restrictions than those placed on fixed rate personal loans, so you can make additional repayments and repay your loan early without penalty. Find out here what kind of loans come with a variable rate and if they are the right option for you.
The biggest attraction generally is their flexibility along with lower establishment and introductory rates, as opposed to the higher fees associated with fixed rate loans. However, due to fluctuating market interest rates, repayments may be uncertain and unstable. If you prefer the certainty of fixed repayments, then you may want to opt for a fixed rate loan instead.
How does a variable rate loan work?
When you apply for your loan, an interest rate is applied to your loan contract, but this rate can vary over the course of your loan term. Your loan term is fixed, but you will generally be able to make additional repayments without penalty and be able to repay the loan early without incurring fees.
Variable rate personal loans can come as secured or unsecured personal loans and terms range from between one and seven years. Depending on the loan you opt for you may be able to borrow between $3,000 and $80,000.
How you can compare variable rate personal loans
- Variable interest rates. The interest rate will vary between lenders, but with so many lenders to choose from, interest rates are usually competitive. The interest rate changes as the market fluctuates, which can present an element of risk. The rise and fall of the market interest rate can be unpredictable, making it harder to budget for your repayments.
- Repayment flexibility. Variable rate loans tend to allow you to make advanced and additional repayments throughout the course of paying off your loan. While some fixed loans are now offering this option, they typically have a limit on the amount that can be paid in advance. You should always confirm the repayment flexibility of your loan before you apply.
- Fees and charges. Check the upfront and ongoing fees when comparing variable rate loans. These can add significantly to the cost of the loan.
- Comparison rates. The comparison rate is extremely important to consider when comparing variable loans. It shows the ‘true cost’ of a loan as it incorporates your interest rate plus any fees you have to pay.
What benefits and drawbacks come with variable rate loans?
- More options. Variable loans usually offer more options than fixed rate loans, including redraw facilities, low introductory rates and no extra fees for making additional repayments.
- Competitive rates. Due to the popularity of this type of loan, lenders offer competitive rates to attract borrowers.
- Non-fixed interest rates. When interest rates drop, you are not locked into a set interest rate, letting you enjoy lower repayments and a cheaper overall amount to pay back.
- Lower fees. Establishment and administration fees and charges are usually lower than on fixed rate loans, keeping your overall cost down.
- Interest rates are unpredictable. As market interest rates rise and fall, so does your loan interest rate. If interest rates rise, the repayments of your loan will increase and may cost you more in the long run.
- Fluctuating repayments. Variable interest rate loans are sensitive to economic conditions and the interest rate of your loan will change over the term duration. It can make it hard to work out a budget if your minimum loan repayments are constantly changing.
Things you might want to avoid
- Not checking fees and charges. Be sure to ask about any extra charges such as administration or application fees. With any major purchase, you need to know exactly what your costs are.
- Borrowing more than you can repay. Only borrow the amount you need, especially with a secured loan as you will lose your asset. However, defaulting on any kind of loan leads to a negative mark on your credit file.
- Extending terms longer than needed. Some lenders might try to convince you to seek longer terms and even offer lower monthly payments as a selling point. Shorter terms mean you pay less interest; so you may want to consider choosing the shortest term that is manageable on your budget.
- Unnecessary extras. You may want to avoid gimmicky extras like payment holidays and cash-back facilities. For example, interest is still accumulated during payment holidays, thereby increasing your overall repayment. With cash-back offers, you stand to lose your cash-back amount if you decide to pay off your loan ahead of time.
How you can apply for a variable rate personal loan
Eligibility criteria differ between lenders, but generally, if you are over the age of 18, are a permanent New Zealand resident or citizen and have a good credit history, you may be able to apply.
Applying for a variable rate loan can take just minutes, as most lenders allow you to apply online, as long as you can provide the necessary documentation. You will need to provide your residential address; employment and income details; bank statements and credit history.