Fixed rate personal loans let you lock into a rate at the beginning of your term, keeping your repayments set for the duration of your loan.
This type of loan comes with a lot of benefits, but also a few added restrictions when compared to its variable rate counterpart. We’ll break these down for you and help you decide if a fixed rate loan is right for you.
Fixed rate personal loans have an interest rate that does not increase or decrease for the duration of the loan term that is stated in your contract. Typical fixed rate personal loans last from one to five years, but some extend up to seven years.
Having your repayments remain fixed for the life of a loan is a big benefit, but it’s important to understand fixed rate personal loans generally come with restrictions. These mostly have to do with repayments. For example, you may not be able to make additional repayments, or you may only be able to make repayments up to a set cap. You may also not be able to repay the loan early.
What can you use a fixed rate personal loan for?
Personal loans that come with a fixed interest rate can be suitable to help you finance a range of different purposes, including:
Purchasing a new or used car
Buying a vehicle such as a motorbike
Taking a holiday
Consolidating debt from loans and/or credit cards
To get married
Features of fixed rate loans
Fixed rate personal loans come with many benefits, but also a few restrictions. Here are the typical features you can expect:
Loan term. Lenders offer varying loan terms depending on the type of loan (secured or unsecured) as well as a number of other factors, but you can usually expect a term of between one and five years, with some lenders extending up to seven years. For some loans, part of this term may be fixed, with the other part of the term having a variable rate attached.
Repayments stability. The interest rate is fixed, and that means your repayments stay the same for your entire loan term regardless of what happens to rates in the market.
Early payment penalties. Fixed rate personal loans usually come with fees for paying your loan back early or for making additional repayments. These differ between lenders, but generally, because you are considering ending the fixed term early, you will be expected to pay a fee. You might also find some lenders only charging fees if you repay your loan within a certain period, for example, in the first year.
Upfront and ongoing fees. Look out for establishment fees or ongoing monthly fees. These aren’t the standard for fixed-rate personal loans, so remember to compare with what’s available.
How to compare fixed rate loans
Given that there is no shortage of fixed-rate personal loans to choose from, compare your options to ensure you end up with the best possible deal. You’ll need to consider the following:
Is the loan secured or unsecured? These are the two most basic types of fixed-rate personal loans. If you’re looking to buy a vehicle or own a property, you can consider a secured fixed rate loan and use the asset you own or are looking to buy as a guarantee. Secured loans come with lower interest than their unsecured counterparts because they’re less risky for lenders – you’ll lose your asset if you fail to repay the loan.
What’s the interest rate? Comparing interest rates is important – this is the rate you will be paying for the whole term of your loan. Compare the loan against similar offerings to get an idea if it’s competitive.
How long is the loan term? This ultimately comes down to what you need. You can expect most lenders to offer repayment terms of between one and five years, but some lenders extend their offerings up to seven years. How long do you need to repay the loan? You can lower your repayments with a longer term, but you will ultimately pay more interest. Decide what you need and then compare lenders so you can find a loan that’s right for you.
What fees and penalties will I be charged? Look out for upfront charges such as establishment fees, any ongoing costs in the form of monthly or annual fees, and what you will be charged if you repay the loan early or make extra repayments. Other costs to watch out for include penalties for late payments.
Pros and cons of fixed-rate personal loans
No change in what you pay. Your monthly repayments will stay the same for the entire loan term, allowing you to budget easily.
Your rate won’t be affected if the market conditions take a turn. If market interest rates decrease, you won’t have to worry about your interest rate increasing.
You still have flexibility with your repayments. You will usually get the choice between weekly, fortnightly or monthly repayments and a choice in the duration of your loan term. While early and additional repayment fees are common, they can be rather different; so compare to find one with lesser fees or lenders who do not charge them.
There are additional fees. Fixed rate loans tend to attract fees for early repayments and for making additional payments than variable rate loans.
You can’t benefit from favourable market conditions. If market interest rates improve, the rate applied to your loan won’t decrease.
There may be restrictions on your repayments. You may not be able to make additional repayments or repay your loan early.
Mistakes to avoid with fixed-rate loans
Taking on a longer loan term than you need. While your repayments might be lower with a longer loan term, you will end up paying more interest. Budget your repayments before you apply and work out a repayment period you can afford.
Taking a loan you can’t afford. Establish your ability to repay the loan before you fill in the application. With a secured loan, you stand to lose your collateral; and defaulting on an unsecured loan can mean a bad credit rating for the next five years.
Not reading the fine print. Scrutinise your loan contract, so you’re aware of all fees, charges and conditions.
How to apply
Compare your fixed rate personal loan options. Once you find a loan that’s right for you, you can click on the lender’s name to read a more detailed review or click “Go to Site” to start the application process.
Confirm your eligibility. You will need to meet the minimum age, income, employment and credit requirements before submitting your application. Online applications may differ, but generally, you will need to provide your personal, financial and employment details.
Wait for approval. You can sometimes find out if you’re approved or conditionally approved within a few minutes, but some lenders may take a longer time. You can check back with the lender to find out about the status of your application. If you’re approved, your loan can be funded any time from that same day to a week later. Check with the lender for details on a timeframe.
Frequently asked questions about fixed rate personal loans
A fixed rate is a rate that is locked into your loan contract at the beginning of your term. With a variable rate loan, you still have a rate applied to your loan contract, but this may fluctuate throughout your term.
This depends on your lender but you may be able to apply for a loan top-up. Keep in mind this may be considered as a new credit application.
This is generally not allowed, but you may be able to make extra repayments for a small fee, depending on your lender. Check your loan contract before you apply.
Fixed-rate loans generally come with more restrictions than variable rate loans, and as such you are given a lower rate by your lender. These restrictions usually come in the form of repayments, for example, not being able to repay your loan early.
This differs between lenders, but you’ll usually be able to apply for a loan term of between one and five years.
Matt Corke is the head of publishing in Australia for Finder. He previously worked as the publisher for credit cards, home loans, personal loans and credit scores. Matt built his first website in 1999 and has been building computers since he was in his early teens. In that time he has survived the dot-com crash and countless Google algorithm updates.
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