Friday, February 6, 2009

Fixed and variable interest

I have been asked the question lately between fixed and variable interest. Some people cannot understand the difference between the two.

Fixed interest loans have the interest remaining the same for the whole duration of the loan. While it may seems to be an advantage to have a fixed interest rate, it is in fact a disadvantage because the interest rate is set not at the medium or half way between the maximum and minimum possible rate, but at slightly above that. So that for a majority of time you will pay more than the official bank rate. This also remove the advantage of paying at a low interest rate when the official lending rate falls.

The variable rate is always a few percentage points above the official lending rate. The interest will then vary with the official lending rate. The disadvantage of having a variable rate is that in time of high interest rate the loan can be difficult to service.

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