Falling interest rates mean lower monthly payments on variable-rate loans-the top choice of many lenders for mortgages, home equity loans, personal loans and charge cards.
But variable-rate loans are not always best for you. For example, if the choice for a personal loan is between a 11 percent variable-rate and a 12 percent fixed rate, the weekly Bank Rate Monitor says the fixed-rate loan is the better deal because it is only a point higher and won`t go up in the future. The variable rate usually is tied to some index, such as the prime rate, which fluctuates.
Here is a glossary of variable-rate loan terms, and some advice.
– Margin: The percentage points the lending institution adds to an index. Make comparisons among the lenders.
– Index: Understand how the index moves and when yours could change. Stick to loans with publicly known indexes, like the prime rate or Treasury bills. Avoid banks that set the rate at their discretion.
– Rate changes: Ask how often the rate can change and when changes are effective. Some banks will time cuts in their prime rate to force borrowers to pay the higher rate a month longer.
