The size of your monthly loan payment will depend mainly on three things: the size of your loan, the repayment time and the interest rate. Because your interest rate is so important, you should take some time to think about how you’d like your lender to structure your interest rate.
With a fixed rate, your interest rate stays they same as long as you have the loan and you know exactly what your monthly payment will be. A fixed rate might be best for you if interest rates are low or if you need very predictable monthly payments.
The interest on a variable rate loan can go up or down depending on how national interest rates move. If rates are high when you take out your loan, choosing a variable rate might mean you’ll get a lower rate later – but there’s also the risk that your rate could go up. If you take out a loan with a variable rate, make sure there's room in your budget for a higher monthly payment in case interest rates rise, and make sure your lender explains exactly how high your interest rate could go and how fast it can increase.
Some lenders might offer a low introductory rate for the first few months of your loan. While an introductory interest rate can save you money, be sure you know exactly how much your interest rate will increase and what your monthly payment will be once the introductory rate period ends. Most important, don't budget for your loan payments at the introductory rate – plan your budget around what your payment will be once the introductory rate expires.
Some lenders might also let you choose loan repayment terms that will give you a lower interest rate. For example, you can get a relatively low rate and low monthly payments by agreeing to repay most of your loan in one large balloon payment after, say, five years. You can get a lower rate by agreeing to pay the lender a prepayment penalty if you pay off the loan early. Before you agree to conditions like these, make sure you completely understand them and are comfortable with what you’re doing. A credit counselor can explain these conditions and what they might mean to you.
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