The Differences Between Fixed And Variable Creditand The Impact On Your Debt

What is fixed credit?

Fixed credit, means you borrow money to buy something and you pay back the amount you have borrowed, usually over equal monthly payments.  An example would be the purchase of a car.  Let’s say you want to buy a car and you shop around until you find one. Now you need to borrow the money to make the purchase. Let’s presume you need $24,000 in total including the fixed interest rate.  The deal is you will pay it back over four years, so your monthly payment will be $500 per month for the next 48 months.

The main advantage of a fixed credit is that you know exactly how much money you have to pay and for how long. This helps you budget and since the rate stays the same for the whole term of the loan, there are no surprises if interest rates go up or change.

What is a variable interest rate?

A variable interest rate means that the interest rate can fluctuate or change depending on what is happening with the economy, stock market, Canadian dollar, etc.  Since these external factors fluctuate, so does your rate. These type of rates are often seen with house mortgages.  With a variable-rate mortgage, your monthly payments can go up or down from month to month.  Although you may benefit when interest rates are low, you may have an issue making higher payments in the event interest rates rise.

Why choose one over the other?

This is really a personal choice and should be looked at very carefully depending on your financial situation and ability to pay.  If your budget is tight to begin with, a fixed credit will allow you to plan in a more efficient way, because you know exactly what your monthly payment is. This can give you peace of mind and a feeling of control over your finances.