Different types of interest rates can be applied to a personal loan. The specific type of interest rate offered will depend on the lender and the terms of the loan. Here are some common types:
Fixed
A fixed rate personal loan means that the interest rate is fixed for the life of the loan. A variable interest rate means that the interest rate on your personal loan may change at any point in time.
Fixing an interest rate gives you certainty that repayments will stay the same for the term of your loan.
It’s a buffer against rates going up and hence increasing your repayment amount.
A rate increase may cause a problem if you’re on a tight budget and have a limited amount to devote to repayments. The downside is, of course, that if rates drop further you may end up paying a higher amount.
Variable
A variable rate will theoretically move up or down in line with the Australian cash rate which is set by the Reserve Bank of Australia.
This results in fluctuations in your payments and the total interest paid. It's important to understand how often and by how much the rate can change, as well as any caps or limits imposed by the lender.
Introductory or promotional
Some lenders offer an introductory or promotional interest rate for a limited period, often at a lower rate compared to the standard rate.
This lower rate is typically in effect for a few months or an initial period, after which the interest rate reverts to the regular rate specified in the loan agreement. It's essential to carefully review the terms and conditions of the loan to understand how long the promotional rate lasts and the subsequent rate that will apply.