Fixed vs Variable Interest Rates: Which Is Better for a Personal Loan?

When you compare personal loans, the interest rate is likely to be one of the first figures you notice. However, the type of interest rate can matter almost as much as the percentage itself.

A fixed interest rate generally remains unchanged for an agreed period, which can make your repayments easier to predict. A variable interest rate may move up or down, meaning your repayments or overall loan costs could change.

So, which option is better?

There is no single rate type that suits everyone.

A fixed rate may be more appropriate when predictable repayments are important to you. A variable rate may be worth considering when you are comfortable with possible rate changes and value repayment flexibility.

At Sunshine Loans, we believe you should compare more than the advertised interest rate. Before choosing a loan, consider its total cost, fees, repayment conditions and how comfortably the repayments would fit within your budget.

What Is a Fixed Interest Rate?

A fixed interest rate is set at a particular percentage and generally does not change during the agreed fixed-rate period.

When a personal loan is fixed for its full term, your required repayments will usually remain consistent, provided you make them on schedule and no additional fees apply.

This certainty can make budgeting easier because you know what is due each week, fortnight or month.

Moneysmart explains that repayments on a fixed-rate personal loan stay the same over the life of the loan, allowing you to know how much to include in your budget.

Advantages of a Fixed Interest Rate

A fixed-rate personal loan may provide:

• Predictable scheduled repayments.
• Protection from interest-rate increases during the fixed period.
• Greater certainty about the loan’s interest cost.
• Simpler household budgeting.

This predictability may be useful when you have limited room in your budget for repayments to increase.

Disadvantages of a Fixed Interest Rate

Possible drawbacks include:

• You may not benefit if market interest rates fall.
• The lender may restrict additional repayments.
• Early repayment or early exit fees may apply.
• The starting rate may be higher than a comparable variable rate.

Conditions differ between lenders.

You should check the credit contract rather than assuming a fixed-rate loan will allow unlimited additional repayments or fee-free early repayment.

What Is a Variable Interest Rate?

A variable interest rate can change during the loan term.

The lender may increase or decrease the rate in accordance with the credit contract. When the rate changes, your required repayment amount or the time needed to repay the loan may also change.

Moneysmart notes that variable-rate personal loan repayments can rise or fall as interest rates change.

It recommends checking whether you could continue to afford the loan if the rate increased by two or three percentage points.

Advantages of a Variable Interest Rate

Depending on the lender and contract, a variable-rate personal loan may offer:

• The possibility of lower interest costs if rates fall.
• More flexible additional repayments.
• Fewer restrictions on early repayment.
• A lower initial rate than some fixed-rate alternatives.

These features are not available with every variable-rate loan, so you should read the terms and fee schedule carefully.

Disadvantages of a Variable Interest Rate

The main risk is uncertainty.

If the lender increases its variable rate, your repayments may rise. This could place pressure on your budget, particularly when you already have little money left after paying for essential expenses.

A variable rate may therefore be less suitable when even a modest repayment increase would be difficult for you to manage.

Fixed vs Variable Interest Rates at a Glance

These are general characteristics only.

The features of an individual loan may differ, so the credit contract and fee disclosures should always be your source of truth.

Is a Fixed or Variable Rate Better for a Personal Loan?

A fixed rate may be more suitable when:

• You want repayments that are easier to predict.
• Your budget could not comfortably absorb a rate increase.
• You prefer certainty over the possibility of saving if rates fall.
• The fixed-rate loan’s total cost is competitive.

A variable rate may be more suitable when:

• You have room in your budget for repayments to change.
• You want the possibility of benefiting if the rate falls.
• Flexible additional repayments are important to you.
• The contract allows early repayment on favourable terms.

Neither option removes the need to assess affordability.

A low starting rate is not necessarily good value if the loan includes significant fees, restrictive conditions or costs that are not obvious from the advertised rate.

You can review our guide to comparing loans for more information about evaluating different loan features.

Look Beyond the Advertised Interest Rate

The interest rate does not tell you the complete cost of a personal loan.

Before making a decision, examine:

• The comparison rate.
• Establishment or application fees.
• Monthly account fees.
• Late or failed-payment fees.
• Early repayment conditions.
• Repayment frequency.
• The loan term.
• The total amount repayable.

A comparison rate includes the interest rate and most fees and charges in a single percentage.

It can help you compare certain fixed-term consumer loans, although it may not include every possible cost or reflect your exact loan amount and term.

You should compare loans using a similar amount and repayment period.

A loan with a lower annual interest rate may still cost more overall if it has higher fees or runs for longer.

How the Loan Term Affects What You Pay

The loan term is the amount of time you have to repay the debt.

A longer term can reduce each scheduled repayment, but it may increase the total amount of interest you pay because the debt remains outstanding for longer.

A shorter term may reduce the overall interest cost, but your individual repayments will usually be higher.

The right term is not necessarily the shortest option available.

It should provide repayments you can realistically afford while avoiding unnecessary borrowing costs where possible.

Before signing a contract, test the proposed repayment against your regular income and essential expenses.

Leave some room for unexpected costs rather than assuming every pay cycle will go exactly to plan.

Questions to Ask Before Choosing a Rate Type

When comparing fixed and variable personal loans, ask yourself:

• Could I still afford the repayments if a variable rate increased?
• How important is it that my repayments remain the same?
• Does the lender charge a fee for repaying the loan early?
• Can I make additional repayments without a fee or limit?
• What is the total amount repayable, including fees?
• Is the expense necessary now, or could I delay it and save?
• Would the repayments affect my ability to pay for housing, food, utilities and transport?

Meeting a lender’s minimum eligibility requirements does not mean approval is guaranteed.

Under responsible lending obligations, a credit provider may need to:

• Make reasonable inquiries about your requirements and objectives.
• Make reasonable inquiries about your financial situation.
• Take reasonable steps to verify relevant financial information.
• Assess whether the proposed credit contract would be unsuitable for you.
• Not enter into a credit contract that is unsuitable.

When you apply with us, we assess your application individually and consider whether the proposed credit contract would be unsuitable based on the information available to us.

An Example of How Your Priorities May Affect the Choice

Consider two people comparing personal loans.

The first person has a carefully balanced household budget and would find an unexpected repayment increase difficult. They may place greater value on a fixed rate, even if a variable-rate loan initially appears slightly cheaper.

The second person has more room in their budget and wants to make additional repayments whenever possible. They may place greater value on a flexible variable-rate loan, provided they understand and can manage the risk of the rate increasing.

These are fictional examples, not recommendations.

The appropriate option for you will depend on the actual rates, fees, terms and personal circumstances involved.

What Type of Interest Rate Do We Offer?

We offer unsecured Medium Amount Credit Contracts to eligible Australian consumers.

Our product is not a variable-rate personal loan.

The rate, repayments and costs applying to an approved loan are set out in the credit contract before you accept it.

Our currently published product features include:

Our prescribed comparison rate is 66.2% per annum, calculated on a $2,500 loan over two years.

We do not offer Medium Amount Credit Contracts over two years. The $2,500 amount and two-year term are prescribed for the comparison-rate example.

WARNING: This comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

Applications are subject to our eligibility requirements, affordability and suitability assessment, and approval.

You can review our current loan costs and eligibility requirements before deciding whether our product may be appropriate for you.

Because we provide a particular short-term credit product, you should not treat our loan as a direct substitute for every fixed or variable personal loan.

Compare the loan amount, term, total cost and repayment structure with other suitable options before making a decision.

Consider Alternatives Before Borrowing

A personal loan may be one way to pay for a necessary, one-off expense, but borrowing is not always the most appropriate first step.

Depending on your situation, you could consider:

• Using available savings.
• Asking the service provider for a payment plan.
• Checking whether you can delay the expense.
• Requesting hardship assistance from a utility provider or existing lender.
• Reviewing your budget for temporary savings.
• Comparing lower-cost credit options.
• Checking whether you qualify for a No Interest Loan.
• Speaking with a free financial counsellor.

These alternatives may help you avoid interest and fees or reduce the amount you need to borrow.

Moneysmart recommends considering a No Interest Loan when you need to borrow up to $2,000 for eligible essential goods or services.

Frequently Asked Questions

Can a Fixed Personal Loan Interest Rate Change?

A genuinely fixed rate generally does not change during the agreed fixed period.

However, fees may still apply in circumstances described in the contract, such as when you miss a payment.

Read the loan terms carefully so that you understand exactly what is fixed and which costs could still vary.

Can a Lender Change a Variable Interest Rate Whenever It Wants?

A lender can only change a variable rate in accordance with the credit contract and applicable law.

The contract should explain how changes can be made and how the lender will notify you.

Is a Fixed Interest Rate Always More Expensive?

No.

Fixed rates are not automatically more expensive than variable rates.

Pricing can depend on:

• The lender.
• Your application.
• The loan amount.
• The loan term.
• Market conditions.

Compare the total cost rather than relying only on the rate type.

Can I Pay Off a Fixed-Rate Personal Loan Early?

Possibly, but some lenders charge an early repayment or break fee. Others place limits on additional repayments.

Check these conditions before accepting the loan.

We currently allow you to repay your Sunshine Loan early without an early repayment penalty.

Interest and any applicable fees will still apply up to the date the loan is repaid.

What Happens if a Variable Interest Rate Rises?

Your required repayment may increase, or more of each repayment may go towards interest.

The exact effect will depend on your credit contract.

Before accepting a variable-rate loan, calculate whether you could manage a meaningful rate increase without missing essential expenses.

Should I Choose the Loan With the Lowest Interest Rate?

Not automatically.

Compare:

• The interest rate.
• The comparison rate.
• Applicable fees.
• The loan term.
• The repayment amount.
• Repayment flexibility.
• The total amount repayable.

A low advertised rate may not represent the lowest overall cost.

Compare the Costs and Repayment Conditions Carefully

Choosing between fixed and variable interest rates involves more than predicting what rates may do next.

A fixed rate can provide repayment certainty, while a variable rate may provide the possibility of lower costs or greater flexibility when the contract permits it.

The more appropriate option is the one whose repayments, fees, risks and conditions suit your circumstances and remain manageable within your budget.

Before applying with us:

• Review our loan costs and eligibility requirements.
• Consider suitable alternatives.
• Check the repayment schedule.
• Make sure the repayments would remain affordable alongside your essential living expenses.

If you believe our loan may be appropriate for your circumstances, you can review our product information before deciding whether to apply.

We assess every application individually, and approval is not guaranteed.

The information provided in this blog is for general informational purposes only and does not constitute financial or legal advice. It is not tailored to the specific circumstances of any individual. Before acting on the information, you should consider whether it is appropriate for you, having regard to your objectives, financial situation and needs.