Interest rate: Difference between a fixed rate and a floating rate

You have probably already heard about the different rates. But do you understand them? This thorny subject is far from obvious to everyone. Indeed, what is the difference between fixed and variable rates? Answers with Sydney Carton.

Variable interest rate

By using this type of interest rate, you agree with financial institutions so that the rate of your credit can vary depending on the evolution of the financial markets, within certain limits.

The rate revision dates are normally provided in advance in the loan agreement as well as the maximum and minimum value for the rate. Whenever it is changed, you can ask your bank for a written letter to notify you. The evolution of interest rates is based on benchmarks such as Euribor for the euro area.

Fixed interest rate

Fixed interest rate

Unlike the floating rate, the fixed interest rate is not subject to changes in the financial markets. You will have the same rate throughout the repayment period. This rate is negotiated with your bank during your loan application and may vary depending on your profile (income, number of loans in progress, family situation, etc.).

Choose a fixed interest rate

Choose a fixed interest rate

If you like security, the fixed interest rate will be the one that suits you best. Indeed, with this one, you are sure to pay a fixed amount every month until the end of your loan. You agree with your bank on the interest rate of your credit and its duration, so you can easily estimate the total amount of your refund.

The disadvantage of this type of rate is that when the rates of the financial markets fall, you may not benefit. If you think that rates may fall further, a fixed rate will cost you more as it guarantees you security.

Since no one can know the future, it is important to estimate your financial capabilities in order to assess whether you can accept some uncertainty.

Opt for a variable interest rate

Opt for a variable interest rate

With this type of rate, you can consider saving on a fixed rate. Not only is the starting interest rate offered by your bank more attractive, but rates in line with the financial markets are also more advantageous.

You may decide to move to a floating rate if you think that financial market rates will stay low or will go down further. It is better, however, to have something to ensure your back in case of a sharp increase in rates. To alleviate this insecurity, you can choose a variable rate capped when signing your loan.

Thus, in case of too high rates, the interest rate of your credit can not exceed a defined ceiling. On the other hand, you can choose how often the rate is revised. The more often it can be reviewed by the bank, the higher the starting rate will be attractive, but the less security you have.

So, variable rate or fixed rate? Your choice will depend on your situation and your desires. Installment loans often only offer the option of a fixed rate. The mortgage offers the possibility of taking a variable rate. Do not hesitate to check with your bank.