Personal loan

You should have this type of personal loan right now

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If you are considering borrowing, read this first.

Key points

  • Personal loans can be an affordable way to borrow.
  • You should consider a fixed rate personal loan.
  • This will help prevent your loan from becoming more expensive due to rising rates.

Taking out a personal loan can be a smart way to finance things you can’t afford to pay up front. It can also be a good way to consolidate and refinance more expensive debt, like credit card debt. But you need the right type of loan with favorable terms, because one of the biggest advantages of personal loans is that they tend to be a more affordable way to borrow.

In particular, personal loans can be divided into two different categories and right now it’s more important than ever to make sure you choose the right one.

Make sure your personal loan has this type of rate

The two categories into which personal loans can be divided are:

The names of each type of loan give the details. A fixed rate loan has a rate that is fixed. It does not change for the duration of the repayment of the borrowed money. Since your loan rate is immutable, your monthly payment does not change, nor does the interest you owe. You’ll know the total cost of borrowing when you take on the debt, and you’ll know exactly how much it will cost you each month so you can budget for it.

A variable rate loan, on the other hand, has a rate that can vary. Specifically, the rate will be tied to some type of financial index. The rate can fluctuate during your repayment period, and if it increases, your monthly payments could increase since you will still have to repay the loan on the same established schedule. More of your payment each month will simply go towards your higher interest charges. And your total costs will increase.

Variable rate loans sometimes seem attractive since lenders usually offer a lower starting rate than you would get if you took out a fixed rate loan. But the problem with that is that you are taking a huge risk. And right now, that risk isn’t worth it, because interest rates have risen and will likely continue to do so.

Inflation is at a 40-year high and the Federal Reserve (US central bank) is scrambling to tighten the money supply to try to bring price increases down to a more manageable level. The Federal Reserve has raised rates several times and has indicated that another rate hike is likely this year.

As rates rise, your variable rate loan will almost inevitably become more expensive. So don’t take the risk of having to pay more in the end when the odds are really against you.

What if you have a variable rate personal loan?

If your loan has a variable rate, chances are your payments have already increased and will continue to increase in the future. You might want to consider refinancing a fixed rate loan if you can find one with affordable payments so you don’t face further rate hikes. Or, depending on how much your rate goes up, you might want to think about trying really hard to pay off your loan sooner to avoid getting stuck with additional costs.

Your personal financial situation will determine whether these options are available on existing loans. But if you take out a new loan, be sure to opt for a fixed rate loan so you don’t find yourself stuck with a type of financing that is sure to get more expensive over the next few months.

The Ascent’s Best Personal Loans for 2022

Our team of independent experts have pored over the fine print to find the select personal loans that offer competitive rates and low fees. Start by reviewing The Ascent’s best personal loans for 2022.