title. i understand the difference between variable and fixed as definitions however with loans, ‘variable’ doesn’t quite register to me..
why on earth would someone consider that type of loan with a purchase of let’s say, a house?
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With a variable loan, the interest rate varies. With a fixed loan, the interest rate stays the same throughout the duration of the loan. Sometimes variable loans have lower rates, and often times they have caps on how much they can increase in a given year. So if you take out a variable loan and the rate starts increasing too much, what you might do is “refinance” it — essentially have another lender buy the loan for you and then enter into a contract with that lender at another (fixed or variable) rate.
As an example, I took out a student loan for grad school about 6-7 years ago. The fixed loan rates were around 6.5% at the time. The variable loan rate was 2.99%. Because of this difference, I chose variable. The variable rate increased about 0.6% each year, and had a cap on how much it could increase per year. By the time I paid it off, it was around 6%, but for much of its life it was lower. Had I taken a fixed rate loan, it would have been 6.5% the whole time. It was still worth doing variable even though the rate increased over time — I saved a lot of money from lower interest rates. My loan rate could have also decreased and, if it increased too much I could have refinanced and taken a fixed or different variable loan.
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