Loans
June 24, 2019

Are Adjustable Rate Loans Ever a Good Idea?

Written By Mary Beth Eastman
Last updated June 24, 2019

Note: We receive a commission for purchases made through the links on this site. Our sponsors, however, do not influence our editorial content in any way.

Simple. Thrifty. Living.

While buying a house or car can be a really exciting and rewarding experience, getting a loan can provide plenty of headaches. With how complex these loans have become, many people are doing whatever it takes to avoid these loans in the first place. And with driving interest rates, we can’t blame them. But whether you have credit card debt, student loan debt, or you’re trying to finally purchase that dream home or dream car, getting a loan is sometimes necessary. However, before you jump into a loan, it’s best to first understand how these loans work. When borrowing money, there are fixed rate loans and adjustable rate loans. In this post, we’ll dive deeper into adjustable rate loans and explain how they might provide some benefits for you.

Just like with most things in life, adjustable rate loans too have pros and cons. See below for the good and bad of adjustable rate loans to see if they work for your needs:

Pros

More Options

A good benefit to adjustable rate loans is that there are usually more options available. Fixed rate loans typically have a fewer options in regards to the loan term. Adjustable loans are typically more flexible and include many options to choose from.

Lower Interest Initially

A huge benefit for these types of loans is that the interest rate is usually pretty low initially. It’s important to note that adjustable rate loans usually have a fixed term initially before the rates start to fluctuate. The fixed rate terms vary, but it’s usually about 5 years. During this fixed period, interest rates are generally lower compared to fixed-rate loans.

Good Short Term Solution

Choosing an adjustable rate loan is a good option if you’re considering owning a car or home for only a short period of time. Using this method, you could take advantage of the lower interest rate during the fixed term, then refinance later on in hopes that the interest rates drop.

Cons

Rates Could Rise Significantly

A downfall to adjustable rate loans is that you never know how rates will fluctuate over time. When using these types of loans, the rate will change annually, but it’s very hard to know how those rates will change. In fact, these rates could skyrocket, costing you hundreds of dollars in added interest.

Total Interest You’ll Pay is Unclear

When getting into a loan of any kind, many people like to know how much interest they’ll pay in total over the life of their loan. With the adjustable rate option, it is unclear to how much you’ll pay over time.

Given that adjustable rate loans provide many pros and cons, it’s vital to do your research before jumping into a loan. Understanding the many details involved with these loans can provide you with the knowledge and confidence you need when making decisions that affect your financial future.

When you’re ready for a loan, check out our roundup of the best online loan sites. Whether you’re refinancing your student debt or you need a personal loan or other loan, online loans make the application process simple and fast. Make sure you’re choosing the best loan for your needs with our in-depth reviews.

About the Author

Mary Beth Eastman

Mary Beth Eastman serves as the content manager for Simple. Thrifty. Living, where she is dedicated to helping readers use money and credit wisely. Mary Beth believes that access to the right financial information paired with a growth mindset are essential tools for getting out of debt and building wealth. Mary Beth has a degree in Journalism from Bowling Green State University and has focused her 20-year journalism career on putting readers front and center, carefully considering their concerns and presenting information that will help them in their everyday lives. She has won numerous statewide journalism awards. Her writing on personal finance as been featured on numerous websites in addition to Simple. Thrifty. Living, including Huffington Post and Lexington Law blog. Mary Beth resides in Pittsburgh, Pa., with her family and two rescue dogs.

  • No comments yet. Be the first to get the conversation started. Here's some food for thought:

    Do you have any thoughts?

Submit a Comment

Your email address will not be published. Required fields are marked *