When concluding a loan, you agree with the bank an interest rate, which is also recorded in the contract. As a rule, this is a fixed interest rate that remains constant. That is not always the case. Also variable interest rates are possible.
Interest rate changes during the term of the loan
For many borrowers, the [interest rate – effective rate] is one of the most interesting points in making a loan. This should be as low as possible, so that the cost of the loan does not increase significantly. Finally, the interest rates have a high impact on the total amount. Therefore, many banks offer their clients the opportunity to opt for a variable interest rate that can be reasonably priced, at least in the early days. However, this includes interest rate changes during the term.
Fixed interest rate during the term
A fixed interest rate always brings with it the advantage that you can estimate what additional costs you will incur with the loan. Nevertheless, the fixed rate may be higher than the current variable rate. Here you have to weigh whether you want to take the risk of rising interest rates or prefer to rely on security. In the case of a fixed interest rate, it is contractually stipulated that the interest may not change during the term. Safety comes first.
Variable interest rate during the term
A second option is the variable interest rate, which is also provided by various banks. With this interest rate, you have no right to remain unchanged during the term. Instead, it can be adjusted at any time, both up and down. The bank has to make it clear to you how the interest rate adjustments will come about. Especially with a falling interest rate, you have the advantage that the total interest amount will be lower. Basically, however, it is a game of chance if you bet on variable interest rates. What at first glance seems like an advantage can quickly turn negative.
The combination between fixed interest and variable interest
Especially with mortgage lending, it is normal that there is a fixed interest period for a certain period of time and after this period is switched to a variable interest rate. This is a fair opportunity for both the bank and the user to save costs. Again, of course, you have the choice and can choose from a predetermined period, how long the fixed interest rate should continue. Frequently, customers decide on the fixed interest rate, as this makes it easier to plan. Of course, if you have the opportunity, this is always the safest option when concluding a loan agreement.
Overview of interest rates during the term of the loan
What happens to your interest during the repayment term depends on whether you have opted for a variable or a fixed interest rate. With a fixed interest rate, you do not have to worry about potential interest rate adjustments. These are excluded during the entire term. By contrast, with a variable interest rate, interest rates may go down or up. This will then appear in your credit account or the bank will inform you about it. You can always check the interest rates of the financial institution.
Umschulden with favorable interest rate development
Frequently, debt rescheduling can be an interesting consideration when interest rates are on the rise, but the builders have a fixed-rate loan that has been closed at a time of higher interest rates. Whether rescheduling a new loan pays off, of course, depends on the cost of rescheduling, because most of the time the early redemption of the loan requires a prepayment penalty that the bank would like to have paid to offset the lost revenue from the loan Balance interest business. Your financial adviser can certainly explain to you how good the interest should be, so that a rescheduling of the old loan still pays off.