Fixed vs. Variable Interest Rates — and How They Impact Your Student Loan
By Rachel Seitz
When deciding whether or not to accept a loan offer, two important numbers you should look at are interest rate and APR. However, there’s another factor whose impact on these numbers you’ll also want to take into account: Whether the interest rate is variable or fixed. You may have seen that our rates here at Climb are fixed. But what does this mean, and how might it affect your loan? Below, we have a run-down of the differences and significance of variable vs. fixed interest rates.
What’s a variable interest rate?
A variable interest rate — also sometimes called a floating interest rate — can vary over time from what you’re first given. Example: If you receive a 7% variable interest rate at the beginning of your loan, it can rise or lower throughout your loan term according to federal interest rates or LIBOR (see below).
What does that mean for you?
That depends on the strength of the market when you initially get your loan. A common measure for what your rate will be is the 1-month London Interbank Offered Rate (LIBOR), which is the rate banks charge each other to borrow money. When the market is down, your interest rate will also go down. But when the market is on the rise and federal interest rates increase (as they are currently), your rates will also increase accordingly. So by accepting a variable interest rate loan, your monthly payment could increase unexpectedly along with higher rates.
What’s a fixed interest rate?
When an interest rate is fixed, it won’t change, no matter what the market looks like. If you’re given a 7% interest rate, it will remain at 7% for the life of your loan. When you receive a Climb loan, the interest rate you’re offered will always be fixed at what you agreed upon when signing.
What does that mean for you?
When your rate is fixed, you can be sure it will remain consistent — and while it won’t get lower, you also won’t have to worry about it increasing. So, you can be certain of the amount you’ll pay in interest on your loan (as long as you make the minimum payment each month). That’s why Climb chose to keep all of our interest rates fixed. We don’t want our borrowers to have a monthly bill that’s larger than what they originally anticipated.
Of course, if you have further questions about our rates (or fixed vs. variable interest rates in general), the Climb team is here to help! You can reach out to our team through live chat at climbcredit.com, email at firstname.lastname@example.org, or phone at 888-510-0533. We’re available Monday–Friday, 9am–9pm EST. We look forward to hearing from you!
Update (September 1, 2018): Since the publication of this post, 1-month LIBOR has increased from 1.88% to 2.08%. Which means that, if you start with a 7% interest rate, that rate will have increased to 7.2% in only four months.
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