Small business owners will sometimes need to take out a loan to keep their businesses running. There are two main types of loans — fixed and variable rate. It is important to understand the differences between these two to determine which one works ideally for your situation. In this blog post, we will discuss their pros and cons so that you can make an informed decision.
Defining Fixed Rate Loans and Variable Rate Loans
What is a fixed rate loan? A fixed rate loan is where the interest rate is set for the life of the account. This means that your monthly payments will never change, making it easier to budget and plan for your expenses. The interest rate is determined by the lender and is usually based on the prime rate plus a margin. For example, if the prime rate is 3% and the margin is 2%, then the interest rate on your loan would be 5%.
What is a variable rate loan? This is a loan where the interest rate can fluctuate over time. This means that your monthly payments may go up or down, depending on market conditions. The interest rate is also determined by the prime rate, plus a margin. The margin is often lower than on a fixed rate loan — the interest rate will be lower when market rates are low. However, it is important to note that your monthly payments could increase if market rates rise.
The factors that can affect interest rate in a variable loan include:
- The prime rate
- The health of the economy
- Inflation rates
- The monetary policy set by the central bank
Pros and Cons of Fixed Rate Loans
Now that we have defined each type of loan, let’s take a look at the pros and cons of each one.
Fixed Rate Loan Pros
- The monthly payments will never increase, making budgeting easier.
- You will know exactly how much you need to pay each month, so you can plan accordingly.
- Fixed rate loans often have lower interest rates than variable rate loans.
Fixed Rate Loan Cons
- You may miss out on lower interest rates if market rates go down.
- The loan may have a higher interest rate than a variable rate loan.
Pros and Cons of Variable Rate Loans
Variable Rate Loan Pros
- You will benefit from lower interest rates when market rates are low.
- The loan may have a lower interest rate than a fixed rate loan.
Variable Rate Loan Cons
- Your monthly payments could increase if market rates rise.
- Budgeting is more difficult since your monthly payment can fluctuate.
So, which is better — fixed rate or variable rate loans? It depends on your situation. If you are worried about your monthly payments going up, then a fixed rate loan may be the best option for you. However, if you are comfortable with a little bit of risk and you believe that interest rates will stay low, then a variable rate loan may be the better choice.
Is a Small Business Loan Fixed or Variable?
This depends on the lender. Some lenders may offer both fixed and variable rate loans, while others may only offer one or the other. It is important to shop around and compare rates before you decide on a loan.
Are Variable Rate Loans a Bad Idea?
Variable rate loans are not necessarily a bad idea. They can be a good option for borrowers who are comfortable with a little bit of risk and who believe that interest rates will stay low. However, it is important to remember that your monthly payments could increase if market rates rise.
Why would you choose a variable interest rate if the risks are higher? The rewards can be worth it. Variable interest rate loans often have lower interest rates than fixed interest rate loans. This means that you could save money on interest over the life of the loan.
LendThrive’s Fixed Rate Business Loans
LendThrive is proud to offer fixed rate business loans alongside our Rate Reduction Rewards program. This program reduces the interest rate as a perk for on-time payments, making it an ideal option for business owners who are looking for a loan with predictable monthly payments.
Regardless if you’re in retail, e-commerce, hospitality, construction, or any other industry, we understand the pain points of a small business owner struggling to keep the venture operational. We also know that taking out a loan is a big decision. This is why we structured our fixed rate loans with our Rate Reduction Rewards offering in a way that will help you meet payments and, ultimately, succeed.
To learn more about our fixed rate business loans, please visit our website or contact us today. Or if you’re ready to take the next step now, apply for a loan today and get as much as $150,000 in as fast as 24 hours. It takes only 5 minutes to apply.