Are Personal Loans Fixed or Variable?

Personal loans offer access to funds for a variety of needs. You can use a personal loan to consolidate credit card debt, make home renovations, cover emergency medical expenses, launch a business – the list is endless. One of the benefits of personal loans is the variety of different ways they can be used. 

Taking on debt comes with risk, and you’ll want a clear plan for how to pay it back. However, in case of an emergency, they can be a way to spread out a big expense without straining your budget. If you choose to use a personal loan for a home renovation or business expansion, personal loans can be a way to add value to your home or company. 

In general, avoid using personal loans for non-urgent purchases. If you can wait and save funds for the purchase, you can save more in the long term. But when you need cash and cannot wait, these financial products offer the flexibility to get money when needed and use it as you choose. 

Are personal loans fixed or variable? Most personal loans are fixed-rate loans, but there are exceptions. Read on to learn about the types of personal loans you could get and how interest rates may change due to factors other than your credit score. 

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

Understanding personal loan interest rates

While a home equity loan, a mortgage, or a small business loan will have stipulations about what you can use the loan for, a personal loan can be used for what you need.

You could use a personal loan to increase the value of your home before selling it or to infuse extra cash into your business. In some cases, investing in improvements in your home or business can increase its overall value beyond what you invest. While you could get a HELOC or a small business loan to make improvements, sometimes a personal loan gives you more flexibility. 

In most cases, you’ll apply for a personal loan if you need cash fast. You could also need a personal loan to cover emergency medical expenses, an unexpected vehicle repair, or major home repairs beyond your emergency fund or insurance coverage. 

Like other types of loans, personal loans charge interest rates related to rates set by the Federal Reserve or “Fed.” The federal interest rate directly affects prime interest rates available to new borrowers. In the case of variable-rate loans, the federal interest rates will continue to influence interest rates at each adjustment period. For example, your loan could be “Fed plus 6%”. In the case of a fixed-rate loan, current Fed rates when you take out the loan will affect the interest rates the lender offers.

What are fixed-rate personal loans?

While you can find a variable-rate personal loan, most personal loans are fixed-rate loans. For a fixed-rate loan, once you receive an interest rate from a lender and agree to the loan terms, your interest rate will remain the same for the duration of the loan. If you have locked in a fixed-rate personal loan and the Fed subsequently raises rates, or rates go up in the market, you will not see changes to your interest rate for your locked-in loan, and the monthly payments don’t change. Of course, this isn’t always a good thing, as you could be stuck with a higher interest rate if you take out a personal loan during high-interest periods and then rates go down.

How it works

Suppose you need $20,000 to cover unexpected medical expenses. You’ve put about $10,000 on credit cards over the past year, and have an outstanding debt of $10,000. You could take out a personal loan to pay off the remaining bills and consolidate interest rates that are lower than standard credit card interest rates. 

Average personal loan interest rates are currently around 12.10%. While that’s higher than you’ll typically see on a mortgage or auto loan, it is also significantly lower than average credit card interest rates, currently 27.94%. Interest rates depend on your credit history, income, debt, and other financial factors. 

For example, if you take out a $20,000 personal loan with a fixed 12.10% interest rate and plan to repay it in 60 months (five years), your monthly payments will be approximately $445.90. You’ll pay $6,754.02 in interest over the five-year loan. Of course, this is a simplified example that excludes origination fees and other costs with taking the loans. You’ll lock in a significantly lower APR than putting the charge on a credit card and paying it off over time, potentially saving thousands over the five year repayment period. 

When to get a fixed-rate personal loan

A fixed-rate personal loan might make sense when you need funds quickly or you want to consolidate credit card debt while locking in an interest rate. Here are the pros of this type of loan:

Pros

• You know exactly how much you’ll pay each month. 
• It’s easier to budget and plan for other expenses. 
• You can lock in a lower interest rate without worrying about changing Fed rates. 

Cons

While fixed-rate personal loans offer a lot of advantages, there are a few disadvantages to be aware of. 

• If interest rates drop, you may be locked in with a higher interest rate.
• In most cases, interest rates are above 10%, this may be a significant amount of interest. \ Taking on additional debt is a financial responsibility that extends into the future. If you are concerned you won’t be able to handle the financial responsibility in the future, maybe a personal loan isn’t a good idea at this time. 

What are variable-rate personal loans?

A variable rate loan is a loan with an interest rate that changes over time, usually after a set period of two to five years. Variable-rate personal loans are more common in mortgages or auto loans, but you can find variable-rate personal loans from a few major lenders. 

With a variable-rate personal loan, your interest rate will change after a set lock period based on an underlying benchmark or index. For example, it might change based on the federal funds rate. Your interest rate could be stated as Fed plus 5%, for example. 

How it works

Suppose you have $20,000 in medical debt and credit card debt that you want to consolidate with a variable-rate personal loan. You may choose a lender offering a five-year personal loan with six-month readjustment periods after the first year. The interest rate is Fed plus 6%. The current fed rate is 5.33%. 

All other fees and factors excluded from this example, for the first year, your interest rate is 11.33%.This may look better than a fixed loan option at first, but after the first year, your interest rate will readjust at predetermined times. With each readjustment, your monthly repayment amount will also readjust and you might owe more. There is uncertainty with how much the repayment account changes, as it often depends on market conditions. 

When to get a variable rate personal loan

You should consider a variable-rate personal loan when you want to consolidate debt, and fixed-rate loan interest rates are high. You can get a lower interest rate in the future as long as you have the financial flexibility to pay both more or less in interest over time. You can also choose a variable-rate personal loan if you expect a higher income or more flexibility in your budget in the future and don’t mind the risk of adjusting interest rates. 

Pros

The main advantage of a variable-rate personal loan is the possibility of lower interest rates. Here is an overview of the pros. 

• Secure lower interest rates in the future (potentially). 
• Peace of mind with lower interest rates than credit cards or other high-interest debt. 
• Even with a variable interest rate, you can budget and plan to pay off debt.  

Cons

There are a few disadvantages of variable-rate loans you should be aware of. These include:

• With changing interest rates, your required monthly payment amount may go up over time, making the overall cost of the loan higher than that of a fixed-rate 
• It’s difficult to plan your budget long-term because your loan amount could go up or down. 
• In most cases, interest rates are above 10%, so you’ll still pay a lot in interest. 

Should You Get a Personal Loan?

Deciding whether you need a personal loan involves considering your total financial picture, including both short-term cash needs and long-term financial goals. If the personal loan replaces high-interest debt, it may be a smart choice. But taking on debt comes with risk, and you’ll want a clear plan for how to pay it back. 

Assuming you’re using the debt for growth—and not to make purchases you can’t afford and should wait to purchase—these financial products offer the flexibility to get money when you need it. With a clear strategy and careful planning, a personal loan could be the first step to raising your credit score, paying off debt, and building your financial future, and possibly most importantly, achieving your life goals today.

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