When researching on the types of personal loans in Singapore available, you will have undoubtedly come across the terms “fixed” and “variable” interest rates. At which point you may have wondered how do these terms truly affect your loan, and which should you pick. The answer to this question actually differs depending on several factors.  article will give you an overview of what fixed and variable interest rates mean, and when to use each of them.

However before proceeding, it is important to point out that you should only make loan applications at a licensed money lender. In Singapore, licensed money lenders are regulated by the Registry of Moneylenders, and thus will only offer reasonable loan terms and employ ethical debt collection processes. These regulations under the Moneylenders Act are meant to protect you, the borrower.

Fixed Interest Rates

As the name suggests, fixed interest rates do not change over the lifetime of the loan. As such, equal payments are made each month and you will be able to calculate the total interest to be paid. With such certainty, it makes budgeting easier as you can plan ahead and set your repayments.

However, two downsides commonly exist. Firstly, money lenders charge higher starting rates for fixed interest loans to reflect the premium of certainty granted. Another downside is that additional loan repayments and early loan repayment are often disallowed or have penalties attached to them.

Without such flexibility, you forego the opportunity for lower interest costs in favour of stability and a known total cost.

Variable Interest Rates

Commonly known as floating rates, variable interest rates constantly fluctuate in line with prevailing rates. While they generally have lower starting interest rates, they are tagged to well-known indexes which causes the fluctuation. Additionally, they may have a variable loan cap that prevents interest rates from going above a pre-set amount.

Typically in a variable interest rate loans, you will be able to make extra repayments without incurring penalties, thus lowering the total amount of interest owed. However, the unpredictability naturally makes budgeting and forecasting difficult, hence putting you in a tight spot if you incorrectly estimated the next payment due.

Which to choose?

Your choice should depend on the interest rate environment that you are borrowing in. In general, you should utilise fixed rate loans when there are favourable (low) interest rates. On the other hand, if you foresee that interest rates are likely to decline during the period of the loan, then you should let your interest rate float. Additionally, even in a flat-to-declining rate environment, a floating rate is more likely to cost you less as their starting rates are typically lower.

If you are considering taking out a personal loan in Singapore, then careful research and consultation with the money lender is needed. Even in the midst of a loan, constantly seek advice from your money lender, who may be able to refinance your debt into a more favourable proposition.