Understanding variable interest rates in Australia

Understanding variable interest rates
Understanding variable interest rates

Need a loan? If advice on variable interest rates in Australia is what you’re after, you've come to the right place!

Although a changing interest rate may seem like the exact opposite of what you'd want, variable interest rates can be very beneficial. 

Though you probably never thought you’d need to read an article on this topic, there’s always so much to consider, and the more we know beforehand, the better it is for our wallets and peace of mind!

What is a variable rate?

Quite simply, a variable rate translates to the amount of interest you pay on your personal loan throughout the period of the loan, not being at a fixed rate, but rather a flexible rate that rises with the economic conditions in Australia and also lowers with the same.  

Naturally, there are pros & cons to a variable rates

One of the initial pros is that the interest rate is lower than a fixed rate. Reason being that a fixed rate secures one variable - BUDGET. So, while a lower rate is attractive in the beginning and, bear in mind it could even drop with a stronger economy, it leads to a disadvantage in a way that should the economy suffer slightly, the rates could go even higher than what you were quoted on your initial fixed rate!

Another pro with variable interest rates is that lenders usually allow you to put more into the account than required. I.e. paying additional money into your account on top of your agreed repayment, thus leading to a shorter loan term and incredible savings.

In tough economic climates, it’s not easy to forecast the rates of interest that consumers will have to pay in upcoming years. And with a long-term repayment, choosing a variable interest rate can be risky when it comes to your finances and can make budgeting a little difficult. Basically, an increase in interest rates could lead to higher monthly instalments, which can leave you short on cash flow if you haven’t budgeted accordingly. This pattern can continue over the years, and that, unfortunately, is the con of variable interest rates, you’re just never able to properly budget for it.

Compare with a comparison rate!

Remember to look at the fees as well when looking at the interest rates being offered by different lenders. You might think you’re getting a great deal with low interest rates, but the company doing the lending might have high fees that you possibly brushed off in the initiation phase, and this could end up costing you more in the end. So look at all your options, if you’re a lady we know how you like to shop, if you’re a man – ask your lady for some advice and shop around, and consider some of the higher rates and lower fees as well, you might be surprised…

Something we haven’t considered – and you should – is a comparison rate. This rate combines the interest rate with its charges to present a more accurate rate for the loan in question. Just make sure to check with each lending company what their protocols are, some of them tend to add other fees that have nothing to do with the expected fees and rates for a loan. Sneaky… but true, as with any company, they’re all different and all come with their own set of pros and cons!

Take a stab at debt consolidation!

Try consolidating your debt if you have a number of credit arrangements with various lenders. It’s far easier to manage and of course could reduce the interest rate you end up with! Check with your lenders first though, as to whether they can offer you a variable rate for debt consolidation, again not all companies will offer this!

Penalties, what penalties?!

While one can’t completely rule out the possibility of a penalty as every company is different from the next… A variable rate is still one of the more attractive options due to the flexibility that tends to come with it. One thing we as humans love to have is CHOICE! With a variable interest rate, we have the choice to pay in more if the rate goes down, we have the choice to speed up the term, and lastly, we have the choice to settle earlier! Companies usually charge a penalty if you settle early when a loan is over a certain amount, and most times with fixed rates.

Access to my money? Tell me more…

As things go in life, we sometimes end up with a little extra cash flow, and whether it be birthday money, a bonus at the end of a hard-worked year, or a rebate for something, instead of blowing it, why not put it back into your loan? It’s a difficult one to do considering you’re paying so much towards it as it is, but the beauty is that you will be able to access this money.

Think of a scenario where you absolutely need the money and don’t have any, instead of trying to borrow the money from someone or take out another loan, you can just reach into your current loan and access up to the amount that you have put in over and above your scheduled instalments.

So not only do you have the option of getting this debt sorted out sooner than later, saving you in interest and the time that you’re tied into a loan, but you’ve now essentially created a mini savings account which you can access funds from whenever the time calls for it!

In closing…fixed or variable interest rate?

Whether you’re Arthur or Martha, our financial lives are tough enough as it is, being smart when it comes to your money, your loans and your budget is the only way to get ahead of the rest and come out smiling every month! Use this advice when considering whether to choose a fixed or variable interest rate, but remember, every financial situation is different and you need to opt for the one that suits you based on your own circumstances!

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