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 APRs than their fixed rate counterparts. As its name suggests, the rate can vary — or change — throughout the term of the loan. Read our guide to learn more about how these loans work, what the benefits are and what you’ll want to watch for before you take one out.
Our top pick for variable rate loans: SoFi.
Borrow up to $100,000 with the choice between a fixed or variable interest rate. No hidden fees.
* Recommended Credit Range: Good to excellent
* Min. Loan Amount: $5,000
* Max. Loan Amount: $100,000
* Loan Term: 3, 5, or 7 years
* Confidential and secure online application
How does a variable rate loan work?
With a variable rate loan, an interest rate will initially be applied to your loan and this rate can change over the course of your loan term. The rate can either go up or down depending on market fluctuations. But your loan agreement will specify the maximum cap APR.
Even though your loan term is fixed, you will generally be able to make additional repayments without incurring penalty charges, and be able to repay the loan early without incurring fees.
A variable rate personal loan can be either secured or unsecured and can have term length between one and seven years with a borrowing amount ranging anywhere from $1,000 and $100,000.
Should you get a variable rate personal loan?
Why you might consider it:
- Competitive rates. Its lower starting interest rate is usually what attracts borrowers.
- Potential decrease in rate. When interest rates drop, you’re 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.
Why you might rule it out:
- Interest rates are unpredictable. As the market fluctuates, so does your loan interest rate. If interest rates rise, your monthly payment will increase, and the loan may cost you more in the long run.
- Harder to budget for. Variable interest 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 hard to budget repayments.
Compare more personal loans from top lenders
How to weigh your options
The biggest attraction is generally their flexibility and lower origination and introductory rates. There are a few factors you should take into consideration when shopping for a personal loan:
- 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 extra fees?
- Fees and charges. Check upfront and ongoing fees when comparing your variable rate loans as they could significantly add up if you’re not aware.
- Total cost of the loan. You should consider how much the loan will cost when all is said is done. This depends on the how long the loan term is, repayment frequency, interest and any other fees that come with the loan.
3 costly mistakes to avoid
- Not checking fees and charges. Be sure to ask about any extra charges such as origination, application fees or any other costs.
- Borrowing more than you can repay. Only borrow how much you need. 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 asset.
- Extending terms longer than needed. Shorter terms mean you pay less interest, so you may want to consider choosing the shortest terms that are 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.
What do I need to apply?
Eligibility criteria differ between lenders, but generally you’ll need to have a good credit history. Most lenders require you to:
- Be at least 18 years old
- Show proof of identification
- List contact information
- Have a regular source of income
- Provide employment history
Applying for a variable rate loan can take just minutes, as most lenders can make decisions online as long as you can provide the necessary documentation after preapproval.