A variable interest rate is simply what it sounds like, therefore, an interest rate that is constantly variable. This means that a loan that you have taken with a variable interest rate can constantly change. One month, the interest rate may be 3% because next month it has gone up to 4%. A variable interest rate simply follows the interest rate situation in general. Now it should be said that it is very uncommon for the interest rate to change so much in just one month but it can.
Variable interest rates
The variable interest rate differs in principle from the fixed interest rate. It can be both higher or lower from the start. What controls this is the expectations that exist in the market. If the lenders believe that the interest rate will go up in the next few years, the floating interest rate is lower than the fixed rate from the beginning. However, if the lenders expect the interest rate to fall, the floating rate will be higher than the fixed rate.
Benefits of variable interest rates
The great advantage of a variable interest rate is that you can make money from having a variable interest rate. If the interest rate falls during your loan period, your loan will be cheaper if you have a variable interest rate, which would not happen if you had a fixed interest rate.
In general, the variable interest rate is lower than the fixed interest rate and will therefore cost less. If you look historically at the difference in variable interest rates and fixed interest rates, it has almost always been cheaper with a variable interest rate in the longer term.
Disadvantages with variable interest rates
The biggest disadvantage is almost the same as the biggest advantage and it is the uncertainty over what the interest rate will be in the future. It may be that the interest rate goes up and then your loan will be more expensive.
Another disadvantage is that the interest rate is constantly changing and this means that you do not know in advance what to pay at the end of the month to the lender. So it becomes a little harder to plan the economy in advance. As I said, it is often not the question of any major changes in interest rates from one month to another, but in the longer term, these can be quite large changes. If you have a large loan, a fairly small change in interest rates can make a big difference in cost at the end of the month.
What to choose then?
It is not possible to say that one should choose something but it is entirely up to each individual borrower. In general, it can be said that there is less risk of having a fixed interest rate, however, this may well be more expensive than the variable interest rate. So if you want to take a little bigger risk that can pay off, it is good with variable interest rates. If you have good margins in your finances, you can fit well with variable interest rates, but if you do not have these margins, security may be better to choose.
It should also be said here that there is nothing that says that a full loan must be in either fixed or floating interest rates. You can divide a loan into different parts that have either fixed or variable interest rates, this is especially true for mortgages where it is usual to do this way.