Fixed or variable personal loan: what’s the difference?

Trying to choose between a fixed rate personal loan and a variable rate personal loan? Each option has its own advantages and disadvantages, and these can impact the amount you repay on the loan. 

Fixed rate personal loans may offer stability and predictability, while variable rate personal loans may offer flexibility and potential cost savings. Understanding the difference and impact of fixed and variable loans may help you make an informed decision and help you choose the one that best suits your repayment needs and financial goals.

Fixed rate personal loan 

As the name implies, a fixed rate loan has an interest rate that stays the same for the whole loan term. This means your monthly repayments also stay the same, so it’s easier to plan your finances and budget than with a variable rate personal loan. 

Westpac has a handy loan repayment calculator to help you estimate how much your repayments could be on fixed rate loans before you apply.  There’s also a personal loan borrowing power calculator to assess how much you might be able to borrow. 

What are the pros? 

1. Fixed repayments
   A potential advantage of a fixed rate personal loan is the predictability a fixed interest rate offers. As your repayments stay the same every month, you can have more certainty throughout the life of your loan, allowing for easier budgeting and planning. 
2. Protection from interest rate increases
   If interest rates rise, your fixed rate personal loan won’t be impacted. This may be beneficial in an environment with rising interest rates. 
3. Automatic repayments
   You can choose to set up automatic repayments for the life of the loan, so you have a repayment schedule in place and that’s one less piece of life admin to think about.

What are the cons?

1. Pre-payment fees
   With Westpac, you can make extra repayments for no fees, however if you want to pay off your loan in full before the term ends, you may be required to pay an early repayment fee. 
2. Future rate changes
   If interest rates go down, you may miss out on a lower rate in the future.  

Variable rate personal loans 

Variable rate personal loans have an interest rate that fluctuates with market conditions. 

A variable interest rate offers flexibility giving you room to move, and more options – typically you’ll repay less if interest rates decrease and more if they rise. With some variable rate personal loans, you may be charged less fees such as early repayment or breakage fees, and you can also access a redraw facility to use any extra funds that you have paid if you need money.

What are the pros? 

1. Benefit from rate decreases
   If the interest rate goes down, your loan’s rate could decrease too, meaning lower monthly repayments. This could result in savings for you over the life of the loan. 
2. More flexibility
   Some variable loans, like the Flexi Loan, act like a continuous line of credit. This means you can choose to withdraw as much as you need, and only pay interest on those amounts, instead of having to take out your whole balance in one sum.

What are the cons?

1. Potential interest rate rises
   Your repayments fluctuate with the rate, meaning you have less certainty and may end up paying more interest than you planned for if interest rates rise. Of course, the rate may go down as well so you could save money. 
2. Harder to budget
   The fluctuating nature of a variable loan may make it more difficult to make a budget or plan your repayments. 

To sum up 

Choosing between a fixed or variable personal loan depends largely on your financial circumstances and purpose of the loan. 

Everyone’s different when it comes to personal loans, so you may want to think about what will suit your financial situation and weigh up your priorities – do you want predictability or flexibility? Either way, there’s an option for you.