Many people focus only on the numbers when looking at their business loans’ interest rates. However, the terms of the rate—fixed or variable—is just as important as the loan amount. Let’s look more closely at fixed-rate and variable-rate business loans and weigh them against one another.
What Are Fixed and Variable Rates?
A fixed-rate private startup business loan charges you the same amount of interest no matter the balance of the loan. The percentage rate remains the same throughout the life of the loan.
Meanwhile, a variable-rate business loan’s interest rate increases or decreases depending upon market interest rates. That rate aligns with a benchmark rate such as the Federal Cost of Funds Index (COFI), and its fluctuation means that your payments will change as you pay off the loan.
Fixed-Rate Loans: Pros and Cons
Here are some benefits you can look forward to with a fixed-rate loan:
- Your loan payment will be the same amount every month, so you can easily budget for it.
- Those repayment amounts will not increase with rising interest rates.
- For long-term loans, fixed interest rates allow more cost-efficiency.
However, no loan is perfect. There are a few potential drawbacks:
- If market interest rates go down, you don’t get to benefit from those lower rates.
- Small business loans often have higher interest rates attached to them.
- You may need a particularly high credit score to secure the loan.
Variable-Rate Loans: Pros and Cons
While “variable rate” may sound a little like gambling, using a variable rate with your loan offers marked benefits:
- Interest rates are generally more competitive (i.e. lower) with variable-rate loans.
- If the base rate goes down, your lender may even reduce the rate of your loan.
- When interest rates decline, you’ll save money in the long term.
Compare these benefits, though, against these potential disadvantages:
- When interest rates go up, your payments will increase with them.
- You don’t have the reliability of a fixed amount to pay every month or quarter.
- You won’t always be able to plan ahead with your budget, as the numbers can change.
At the end of the day, there’s no one right answer for what type of loan you should take out. Fixed-rate and variable-rate business loans both have their benefits and drawbacks, and it all comes down to market interest rates: How willing are you to work with a changing market? Factor flexibility into your budget no matter what. Pango Financial offers plenty of funding options to tailor to your business needs.