When a more formal credit arrangement is necessary for a larger purchase, then your bank should be the first place to go to ask for a personal loan. Just remember, borrowing money always comes at a price. The more money you borrow, the longer it will take to pay it all back and the more interest you will pay, making your purchase more and more expensive each month. That is why it is so important to understand how interest works, before we begin talking about the different types of loans available today.
There are two basic types of loan interest: fixed rate and variable rate. Both offer their own pros and cons and should be considered carefully before any type of loan is considered.
Fixed Rate Interest is a set interest rate that does not increase during the life of the loan no matter what! However, should interest rates suddenly nose dive you will be stuck paying the higher rate for the life of the loan.
Variable Rate Interest, on the other hand can fluctuate depending on the terms of your loan. In most cases, the interest (and your monthly payments) increase to match the current rate. But, in a downturn, they may decrease. This type of loan can see a change in interest rate monthly, quarterly or annually depending on the terms of your loan, which can make it difficult to budget your incoming monies.
Why is it so important to understand the difference between a fixed and adjustable rate loan? Because it can have a dramatic effect your monthly payment now and for the years to come.
Certainly, variable rates can be much lower, but they come with a big risk. If you are using that low starter variable rate to either qualify for loan at all, or to simply buy bigger, you may want to reconsider. After all, the odds are those payments will increase over time not decrease, and those increases can add up to hundreds of dollars per month.
But, before you decide for or against either type of loan, look at their good and not so good points.
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