How to Choose Between Fixed- and Variable-Rate Loans
Journal of Banking and Financial Research (BankArchiv), Vol. 67, No. 2. pp. 125-135
21 Pages Posted: 24 Sep 2018 Last revised: 13 Feb 2019
Date Written: 2019
The current low-interest-rate landscape influences the decision whether to secure these low long-term interest rates with a fixed-rate agreement or to benefit from the current negative short-term rates with a variable-rate loan. The decision is based on expected future interest rates. We propose two criteria, namely the effective interest rate and the total repayments which serve as an approximation, to decide what type of loan is more advantageous. In this context, we also present the effects of varying future interest rates on the three selected repayment agreements; i.e. lump sum, constant principal and annuity repayments.
Keywords: Optimal Loan Choice, Effective Interest Rate, Fixed- and Variable-Rate Loans
JEL Classification: G21, G31, G32
Suggested Citation: Suggested Citation