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What is a hybrid personal loan?

A hybrid loan is a unique lending product that has some advantages over other lending options.

A hybrid personal loan combines elements of fixed-rate loans and loans with variable interest rates. They may be offered as either a lump-sum loan or a revolving line of credit. You may be able to get more competitive interest rates with hybrid loans than you could with more traditional lending options.

What is a hybrid personal loan?

A hybrid personal loan is similar to a hybrid mortgage but far less common. Essentially, it’s a type of lending that blends characteristics of fixed-interest-rate loans with variable-rate loans. Hybrid personal loans may be offered as either a lump sum loan or a personal line of credit.

With a lump sum loan, you’ll typically get a fixed interest rate to start, and then the variable rate is triggered after a set number of years. A hybrid personal loan might be a good idea if you think you can pay the loan off before the variable rate kicks in or if you plan to refinance the loan before the fixed-rate period ends.

By contrast, a line of credit hybrid loan starts with a variable rate during the draw period and then converts to a fixed-rate installment loan once you enter the repayment period. A hybrid line of credit might be a good fit if you need access to a sum of money but don’t necessarily need it all at once, like if you’re making home improvements.

What’s a draw period?

The “draw period” for a line of credit is the period during which you can withdraw funds at any time up to your borrowing limit. Draw periods for hybrid lines of credit are usually six months to a year but may vary. Once the draw period is up, you transition to the repayment period and can no longer make withdrawals.

How do hybrid personal loans work?

If you apply for a hybrid personal loan, you’ll receive the loan proceeds in a one-time lump sum payment and then pay it off in equal monthly installments, just like with a traditional personal loan. The difference is, unlike a regular personal loan, you’re not stuck with the same interest rate for the entire loan term.

For example, say you take out a 10-year hybrid personal loan. At the beginning of the loan, say the first five years, you pay a fixed interest rate and make equal monthly payments. After the five years is up, your loan is converted to a variable interest rate for the remainder of the loan term, meaning your payment could fluctuate as interest rates rise or fall.

One advantage of a hybrid loan is locking in a relatively lower interest rate when your loan balance is at its highest. A potential downside is your loan payments could be significantly higher for the remainder of the loan term if interest rates go up. However, you may be able to refinance the loan after the initial fixed-rate period if you prefer the predictability of equal monthly payments.

How do hybrid personal lines of credit work?

If you qualify for a hybrid personal line of credit, the lender gives you a revolving line of credit, similar to a credit card. You can borrow as much as you want up to the borrowing limit set by your lender and within the designated draw period. Draw periods may vary by lender, but it could be six months to a year.

“This is similar to a home equity line of credit (HELOC), but since it’s not backed by an asset, like the borrower’s home equity, the interest rate and fees are typically higher,” says Austin Kilgore, an analyst with the Achieve Center for Consumer Insights.

Hybrid lines of credit, in contrast to lump sum loans, start with a variable interest rate that stays in place over your draw period. Lines of credit typically only require interest payments during the draw period, but you can always pay more if you prefer.

Once the draw period is up, you enter the repayment period, during which you’re assigned a fixed interest rate. Then, you’ll make principal and interest payments in equal installments for the remainder of the loan term.

The nice thing about a hybrid line of credit is that you have borrowing flexibility during the draw period, like a credit card, and you only have to repay the amount you use. Then, once you get into the repayment period, you are locked into a fixed rate, which is, typically, a much lower interest rate than credit cards charge.

How common are hybrid loans and lines of credit

These types of hybrid loans are not common and can be hard to find, explains Kilgore.

“Adjustable-rate personal loans are uncommon because (the) repayment period of this type of debt is often too short for it to make sense for borrowers or lenders. Personal lines of credit are similarly uncommon in mainstream consumer lending because they’re not as flexible to use as a credit card and typically cost more than a home equity line of credit.”

How are interest rates calculated for hybrid personal loans?

Like other loans, the fixed interest rate you qualify for is based on the lender, your credit score and history, debt-to-income ratio (DTI) and other considerations, says Joe Camberato, CEO of NationalBusinessCapital.com.

“(The rate) depends on many factors like your financial history, how much you’re borrowing and how long you plan to pay it back, but it starts with the Federal Reserve’s prime rate. Lenders incorporate a premium based on the borrower’s risk profile. For instance, in 2024, with the prime rate at 8.5% for business bank loans, lenders typically add 2 to 3 percent, resulting in an overall interest rate ranging between 10 and 11%.”

Note that the fixed interest rate for a hybrid loan can often be less than a traditional personal loan with a fixed rate for the life of the loan.

How often do variable rates change with a hybrid loan?

How often your rate changes when you’re in the variable-rate period depends on your lender and can be influenced by market changes.

“Your loan agreement will specify how often the interest rate can change,” says Camberato. “Usually, lenders adjust variable rates monthly, quarterly, semi-annually or annually. If you’re unsure when your rate might change, it’s best to reach out to your lender early to avoid unexpected adjustments to your payments.”

Why get a hybrid personal loan?

There are several scenarios where getting a hybrid personal loan makes sense.

  • You plan to pay it off early. If you think you can repay the lump sum hybrid loan within the fixed-rate period, you’ll save money on interest charges and avoid the concern that rates could go up.
  • You want to refinance. If you think interest rates will rise by the time you enter the variable-rate period, you could refinance the hybrid loan to a regular, fixed-rate loan.
  • You think rates will go down. A hybrid loan could be a smart move if you think interest rates are on a downward trend and hope to see your loan payments decrease during the variable-rate period.
  • You want loan flexibility. If you need money for an ongoing project, such as home renovations, and want the borrowing flexibility of a credit card without the high interest rates, a hybrid line of credit might make sense.

Pros and cons of hybrid loans

Every type of lending comes with potential benefits and drawbacks to consider.

Pros

  • Lower fixed rates. Because hybrid loans use a combination of fixed and variable rates, the fixed interest rates are often lower than a traditional personal loan.
  • Lower payments. There is the potential for payments to go down if interest rates drop.
  • Refinance at lower rate. You might be able to refinance at a lower rate after the fixed-rate period ends.
  • Borrowing flexibility. With a hybrid line of credit, you can borrow as much as you need, pay it back and borrow it again during the draw period.

Cons

  • Potential for higher rates. If interest rates go up, you could wind up with much higher monthly loan payments.
  • Budgeting issues. It can be more difficult to budget for loan payments that fluctuate.
  • Refinancing may not be an option. Depending on your financial situation and market conditions, refinancing once you hit the variable-rate period may not be a viable solution.

Requirements to get a hybrid loan

Lender requirements vary, and because hybrid loans are more specialized, you may need to meet more stringent criteria to qualify for a hybrid loan.

  • Minimum credit score. Some lenders accept credit scores as low as 600 for personal loans, but a hybrid loan may require scores of 670 or more.
  • Sufficient income. Because hybrid loans have variable rates, lenders want to make sure you have enough income to cover potentially higher monthly payments if rates go up.
  • Low DTI. Some personal loan lenders accept a debt-to-income ratio of 43% to 50%, but a hybrid loan lender may require a DTI of less than 40%.
  • May need collateral. Depending on the lender and your financial situation, you may need to put up collateral to secure a hybrid loan.

Alternatives to hybrid loans

If you don’t think you’ll qualify for a hybrid loan or it doesn’t seem like the right fit, consider some other options.

  • Personal loan. A fixed-interest personal loan is a solid option for borrowers, especially if you can score lower rates with some of the top personal loan lenders.
  • Use your equity. If you own your house and have some equity in it, consider a home equity loan or a home equity line of credit (HELOC) to solve your borrowing needs.
  • Credit cards. Depending on your credit score, DTI and other factors, you may be able to apply for a credit card with a borrowing limit that meets your needs — even better if you can get one with a 0% introductory rate on purchases.

Bottom line

A hybrid loan, which has periods of both fixed and variable interest rates, is an alternative to fixed-rate personal loans. It might be a good idea if you can pay off your loan early, want flexible borrowing ability or believe interest rates will go down. However, it can be more difficult for some borrowers to budget for monthly payments that fluctuate with market changes.

“This loan is great for people who care about interest rates,” adds Camberato. “If you’re getting a loan when rates are high but expect them to drop later on, a hybrid loan could be just what you need.”

Frequently asked questions

Can hybrid loans help you build credit?

Any debt that you manage responsibly can help you build credit. Showing that you always make on-time payments, repay your debts and have a diverse mix of credit types can all boost your score. For example, if you only have credit cards in your credit history, a hybrid loan can add to your credit mix.

Can I get a no credit check hybrid loan?

Hybrid loans are fairly rare and highly specialized, so it’s somewhat unlikely you would find a lender willing to offer a no credit check loan that follows the hybrid model.

Can I get a hybrid personal loan with bad credit?

Since hybrid loans are less common, they may have more competitive requirements to qualify. That means borrowers with bad credit scores may not be eligible for loan approval. However, if you have a very high income, collateral to secure the loan or get a loan with a cosigner, you may be able to boost your odds of qualifying for a hybrid loan.

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