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The loan term usually ranges from 1 to 10 years. Fixed rate loans are preferred by those people who are comfortable paying a constant amount towards loan repayment over a given period of time. As a result they are able to allocate a fixed amount from their budget towards loan repayments without any strain on their purse and without worrying about the fluctuations in interest rates of the Reserve Bank. Fixed rate loans become popular during such periods when the interest rates are very high or are beginning to increase.
Although many fixed rate loans offer a redraw option or the flexibility of repayments during the fixed rate loan period, but most of the fixed rate loans come with limited features and facilities. However, fixed rate loans often charge very large amounts as fees for flexible payments so that the loan can be cleared off early.
Since it is very difficult to predict when the interest rates will rise or fall, it is advisable to opt for shorter fixed rate loan terms such as for 3-5 years. After the fixed rate loan term gets over, the interest on the loan automatically reverts back to the current variable loan interest rate. However, if someone wishes to continue with fixed interest rate, they can ask their financial agent to rollover their loan to another fixed term.
The greatest drawback of fixed rate loans is that if the interest rates drop during the fixed rate loan term, then inspite of the drop in interest rates, the borrower continues to make comparatively much higher loan repayments. Limited repayment options and redraw facility is yet another drawback of a fixed rate loan.
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