The popular saying that “cheap is expensive” also applies to loans. Honestly, how many have not been tempted to see ads of “low” interest rates, zero commissions, substantial reductions in the premium to be paid, among many other facilities? Such offers are common, for example at fairs, but a “detail” that could seriously erode their finances is generally ignored: the attractive rate they offer is variable.
When a credit agreement is signed
It is rarely read in detail and the interest is not understood. When talking about a variable interest rate, bank representatives often say that it could increase “a few cents”, so that customers do not consider it a risk.
But there are cases like those of a colleague who signed a mortgage loan with a variable rate, because the bank advisor promised that the fee would not change much, but over time the rate was adjusted upwards and for six months he came to pay 20 dollars more compared to your initial fee. He had to request the review from the bank, claimed and the fee was reduced. He currently pays $ 11 more each month than when he started the loan.
As I have insisted in other articles, in a highly dollarized economy such as Nicaragua, but with salaries in Cordoba and with an annual slip (devaluation or loss of value) of five percent, a change of ten or twenty dollars in a monthly installment can unbalance any average budget.
That is why before getting a loan you must take into account:
Do not leave with the first option. In the local financial system there are half a dozen banks, we must compare the interest rates they offer and mainly understand how that rate is structured. The bank advisor should explain what the base rate is and what factors are added to it (if it is the behavior of an international reference rate, the average rate published by the Central Bank, etc.). If the rate is variable, it will be reviewed quarterly.
Rate a fixed rate
This is mainly for very long-term loans, such as mortgages and not all users can apply. Generally fixed rates are agreed when banks offer the credit, but when it is the user who comes to request it, it must be he who initiates the negotiation. Although a fixed rate could initially be higher than the variable rate offered, in time it would save strong increases in their fees, as happened to the colleague.
The advantage of the fixed rate
Is that you could budget your installments without problems they will not vary, but whether the financial institution approves it or will not depend on other factors such as the level of risk of the loan type and the credit rating of the client. It is important to have a good credit record.
Variable rates are manageable by people with flexible budgets, who can take that risk without damaging their finances. But you should know that the rate initially agreed would be the minimum rate over the life of your credit, you can go up but not go down that amount.
If your credit is very short-term
The variable rate may suit you, as the review is every three months and in such a short term it would hardly increase much.
If you want to give weight to your weights, analyze these factors before deciding on a rate. Also take the time to compare the credit offer, as one bank may offer you a better deal than another.