Business Loans: Fixed Rate vs Variable Rate

When shopping for a business loan, you will usually be able to choose between a fixed rate and variable rate. As a business owner, there are a number of different reasons that you could need a loan. Both fixed rates and variable rates could be beneficial, depending on your reason for the loan. Choosing between one or the other could be tough. If you are trying to decide between the two types of rates, here are a few things that you need to consider. 

Fixed Rate

With a fixed rate business loan, you will be subject to the same interest rate throughout the entire body of the loan. With a fixed rate loan, you will have one payment throughout the term of the loan. Having the same monthly payment over the entire course of a loan makes it easier to budget. You know exactly what to expect every month, and you can plan accordingly. 

With a fixed rate loan, you are also not subject to the interest rate that is prevalent in the market. Even if the market interest rate goes through the roof, you do not have to worry about it. Your rate is fixed and it cannot change regardless of what happens. This removes a potential worry. 

Variable Rate

With a variable rate loan, your rate can change periodically throughout the loan. A variable rate is usually tied to an index that fluctuates in the market. Therefore, if the index goes up, your interest rate goes up as well. On the plus side, it will also go down from time to time. 

Usually when a business owner considers a variable rate it is because the initial rate is lower than a fixed rate loan. They know that the fixed rate loan would probably be the safer choice. However, the low interest rate and initial payment entices them to go with the variable rate loan. 

When you go with a variable rate loan, you have to be prepared for the risk. You have to know that the interest rate is going to go up at some point, and be prepared for it. Your interest rate could effectively double your payment from where it was when you started the loan. If you are not ready for this rate increase, you could find yourself in trouble. 

The big benefit of a variable loan is that it can save you money if you time it correctly. Sometimes, interest rates stay low for a long period of time. If you can get in at the beginning of a low period, you could save yourself some substantial money as compared to a fixed rate loan. 

When you go with a variable rate loan, you have to learn to live with the unexpected. Just know that your monthly payment is going to fluctuate from one year to the next. As long as you can deal with uncertainty, a variable rate loan could be the way to go. 

Blended Rate

A blended rate is a type of interest rate used by lenders in order to try to retain existing customers. With this type of rate, the bank offers a borrower a rate that is higher than what she has been paying on an existing loan but lower than what she would be able to get if she went out into the market and got a new loan.

The purpose of the blended rate is to give customers an incentive to stay with a bank when they refinance. Customers would not be able to secure a rate this low in the open market, so it gives them a good incentive to stay with the same lender. At the same time, the bank benefits by keeping its existing customers and not losing them to another lender.

For example, if an individual had an interest rate on an existing loan of 4 percent, and market interest rates were now 8 percent, the bank might offer the customer an interest rate of 6 percent instead of the full 8 percent that it would charge a new customer. In many cases, the customer can keep her 4 percent rate on the existing balance and then pay only 6 percent on new money that is being borrowed.

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