Types of Loans
31 Jul 2015
A variable loan is the one in which the interest rates varies, that is, goes up or down depending on the official rate set by the Reserve Bank of Australia. Thus, the repayments vary from time to time. This is one of the most widely opted for loan because it allows one to make extra repayments. However, one of the biggest drawbacks of the variable loans is that the repayments fluctuate a lot, thus, one has to plan one’s finances accordingly.
A fixed loan is the one in which the interest rate is fixed for a certain period of time regardless of the official rate set by the Reserve Bank of Australia. Thus, the repayments in a fixed loan do not vary. One of the biggest advantages of the fixed loan is that one’s household budget does not get affected with the change in the official rates. However, one is not able to benefit from a decrease in the official rates and one may end up paying more than someone with a variable loan.
As the name suggests, a Split Rate loan is the one in which a part of the loan is variable and the other part is fixed. Significantly, it is the borrower who decides on the proportion of variable and fixed. Since this type of loans shares the features of both the variable and the fixed loans, the pros and cons of both these loans apply to this one.
In ‘Interest Only’ type of loan, the borrower repays only the interest on the amount borrowed usually for the first one to five years of the loan, and it is only at the end of the ‘interest-only’ period that the borrower begins to pay off both the interest and the principal. This loan is quite popular because the monthly repayments are easily manageable and lower than the ones in variable or fixed loans.