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

See all articles by Edwin O. Fischer

Edwin O. Fischer

University of Graz/Finance

Lisa-Maria Kampl

University of Graz

Date Written: 2019

Abstract

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

Fischer, Edwin O. and Kampl, Lisa-Maria, How to Choose Between Fixed- and Variable-Rate Loans (2019). Journal of Banking and Financial Research (BankArchiv), Vol. 67, No. 2. pp. 125-135, Available at SSRN: https://ssrn.com/abstract=3244477 or http://dx.doi.org/10.2139/ssrn.3244477

Edwin O. Fischer

University of Graz/Finance ( email )

Universitätsstrasse
15/G2
Graz, 8010
Austria
+433163803510 (Phone)

Lisa-Maria Kampl (Contact Author)

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

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