Adjustable- vs Fixed Rate Loans: What’s the Difference?

Business loans are often classified as either adjustable rate or fixed rate, depending on their interest. Both types are offered by banks and private lenders. If you need capital to finance your business, you may want to secure an adjustable- or fixed-rate loan. What’s the difference between these two types of loans exactly?

Adjustable- vs Fixed-Rate Loans: What’s the Difference?

What Is an Adjustable-Rate

Also known as a variable-rate loan, an adjustable-rate loan is a form of debt financing that’s characterized by a fluctuating interest rate. All loans require interest payments. You’ll have to pay a percentage of the borrowed money to the lender from which you acquire the loan. With an adjustable-rate loan, the interest rate may fluctuate on predetermined dates.

What Is a Fixed-Rate Loan?

A fixed-rate loan, as you may have guessed, is a form of debt financing that’s characterized by a static, unchanging interest rate. You’ll still have to pay interest on a fixed-rate loan. Interest is how the lender makes money. Fixed-rate loans are different from adjustable-rate loans, however, because the interest rate doesn’t change. Regardless of the length of the loan, the interest rate will remain the same if it features a fixed rate.

Benefits of an Adjustable-Rate Loan?

Although there are exceptions, adjustable-rate loans are typically cheaper upfront. This is because the initial interest rate is usually lower than that of fixed-rate loans. Over time, the interest rate will increase, resulting in higher interest fees. During the beginning of an adjustable-rate loan, though, you can expect a low interest rate that allows you to save money on interest fees.

Because it has a lower interest rate initially, adjustable-rate loans are a popular choice among startups. Startups have limited cash flow, so many of them prefer adjustable-rate loans. They can secure an adjustable-rate loan while still having the funds to grow and expand their operations.

Benefits of a Fixed-Rate Loan

Fixed-rate loans are cheaper in the long run than adjustable-rate loans. Most fixed-rate loans have terms of about one years to 10 years. Regardless of the term, the interest rate won’t change.

With a fixed-rate loan, you don’t have to worry about the interest rate increasing and, thus, harming your business’s cash flow. Even if it’s a 10-year loan, the interest rate will remain the same. Fixed-rate loans are defined by their use of a static, unchanging interest rate.

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