A fixed rate keeps the rate and scheduled repayment stable for the fixed period. Check whether early repayment fees or limits apply. A variable rate can rise or fall. Many variable loans provide more flexibility for extra repayments, however the contract decides the features.
Fixed or variable-rate debt consolidation loan: what should you compare?
Once you know which debts a consolidation loan would pay out, you can compare a fixed rate with a variable one. A fixed rate gives you more certainty about scheduled repayments, while a variable loan may give you more flexibility to pay the debt down early.
Neither is automatically cheaper. Compare the actual offers available to you, including their rates, fees, terms and repayment rules.
A fixed rate gives you a scheduled repayment that doesn't move when market rates change during the fixed period. That can make budgeting easier when you're replacing several due dates with one repayment.
Some fixed personal loans charge an early repayment fee, restrict extra repayments or calculate a cost when the loan is paid out before the agreed date. Others are more flexible, so check the terms rather than relying on the label.
Ask the lender:
A fixed repayment can be valuable when payment certainty is the main reason you are consolidating. It does not protect you from fees, and it will not fall if market rates go down.
A variable rate can move during the loan term. If it rises, your required repayment or the cost of the loan may increase. If it falls, the repayment or interest cost may decrease, depending on how the loan is structured.
Variable personal loans often allow extra repayments or early payout with fewer restrictions. That can suit someone who expects to use a tax refund, bonus or improving cash flow to finish the debt sooner. Again, the contract decides whether those features are available and what they cost.
Before accepting a variable rate, check how the lender tells you about changes and whether the repayment updates automatically. A direct debit set to the old amount can create a shortfall if the required repayment rises and the payment instruction does not change with it.
MoneySmart suggests checking whether you could still afford a variable personal loan if the rate rose by 2% or 3%. Test those higher rates rather than assuming the starting rate will last for the full term.
For a $20,000 loan over 3 years (illustrative), the repayment at 9.99% is about $645 a month. At 11.99%, it is about $664. At 12.99%, it is about $674. Fees are excluded.
| $20,000 over 3 years (illustrative) | Monthly repayment | Total interest |
|---|---|---|
| 9.99% | ~$645 | ~$3,229 |
| 11.99% | ~$664 | ~$3,911 |
| 12.99% | ~$674 | ~$4,256 |
The move from 9.99% to 11.99% is around $19 a month in this example. The extra interest over 3 years is about $682. A longer loan or larger balance would make the difference bigger.
If the rate rose after the first year rather than at the start, the effect would be smaller because some principal would already be repaid. On the same example, starting at 9.99% and rising to 11.99% after 12 months would lift the recalculated repayment from about $645 to $658 for the remaining 2 years (illustrative).
Compare the fixed offer with the variable starting rate in the debt consolidation offer comparison tool, then test the variable option at 2 and 3 percentage points higher. You'll see the monthly repayment and total cost together.
Check rates, fees, repayments, terms and estimated total cost.
Try the calculatorThe interest rate is only one part of the cost. A comparison rate includes the interest rate and most fees using a standard example amount and term. It can help compare offers, however your balance and term may be different from the example behind it.
List the fees separately:
A fixed offer with a slightly higher interest rate but fewer fees may cost less than a lower advertised variable rate with ongoing charges. A variable offer may cost less in another comparison. Use the rates and fees from each personalised offer and contract in your calculation.
Before choosing between fixed and variable, check whether either proposed loan improves the arrangement you already have.
Add together the current repayments, balances, remaining terms, interest and account fees. Then compare those with the proposed loan's full term and total repayment. If the new monthly amount is lower because a 2-year balance is being stretched over 5 years, state that plainly in the result.
Some people may accept an equal or slightly higher total cost because one stable repayment and a known end date make the debt easier to manage. That can be a reasonable trade-off when it is understood in advance. It should not be described as a saving.
Install WeMoney and connect your accounts to see your debts, balances and repayments beside your income and spending. This gives you the full financial picture and a practical starting point for testing whether a fixed or variable consolidation repayment would fit.
WeMoney uses your connected accounts and credit information to show personalised savings opportunities in the For You section. Debt-consolidation, credit-card payoff or refinancing opportunities may appear where they are relevant to your position. Open the app to see your personalised opportunities, then compare any offer with your current debts using the rate, fee and payout checks above. Potential savings and approval are not guaranteed.
A longer term lowers the repayment and can still cost more overall, whichever rate type you choose: the debt consolidation term trap works through it.
A 2% or 3% rate-rise test is especially important when the proposed repayment already uses nearly all the money available after essentials. A variable loan that only works at its starting rate may not leave enough room for car rego, medical costs or an irregular bill.
If existing repayments are already being missed or essentials are going back onto credit, contact the current providers' hardship teams or speak with a financial counsellor before applying for another loan. The National Debt Helpline on 1800 007 007 is free, independent and confidential. Consolidation requires a sustainable repayment, regardless of whether the rate is fixed or variable.
This article provides general information only. It does not take your personal circumstances into account and is not financial, credit or legal advice. Consider your own situation and seek advice from a suitably qualified professional if you need it.
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