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Fixed APR vs Variable APR

By on May 09, 2022 5 min read
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Fixed APR vs Variable APR

Accessing the funding you need is key to helping your business grow. Business loans are one of the most common sources of money small business owners use to aid their companies. These loans come in two distinct forms with different rates, fixed APRs and variable APRs.

Before determining which one will benefit you most, let’s look at each of these to understand better how they work, the differences between them, and their pros and cons.

What is Business Loan APR?

Business loan APR, or Annual Percentage Rate, primarily refers to the yearly rate a lender charges when you borrow a business loan from them. Any fees associated with your loans, like interest rates and origination fees, may also fall under your APR’s heading.

Typically, small business owners spend most of their time searching for loans with the lowest monthly payment requirements and interest rates. But if you truly want to get the best financing option for your business, you need to take the time to understand the APR rates associated with each loan type you may consider. 

This is because, unlike interest rates and monthly payment projections, APR rates can give you a complete picture of everything you’ll need to pay–monthly rates, interest rates, service fees, and other potential hidden costs that can drastically affect how much you will have to pay.

Difference Between Variable and Fixed APR

There are two main categories of APR rates: fixed and variable. Each of these works in slightly different ways with different costs and fees associated with them, so understanding their differences can help you choose the best option for your business.

What is a Fixed APR?

As its name may suggest, fixed APRs have a fixed price that remains the same throughout their lifetime. The fixed rate cost is set based on the most current market conditions when an individual applies for the loan. That makes it much easier for business owners to set consistent budgets and avoid missing or miscalculating payments.

Typically, credit cards, automotive loans, and home loans have fixed APR.

What is a Variable APR?

While fixed APRs are generally unchanging, variable APRs are rates that can–and usually do–change over time. This change happens because variable APRs are based on an index that lenders use to create their own rates. An example of this would be the prime rate. 

When deciding between a fixed and variable rate, keep in mind that the longer your loan term is, the riskier it can become for the borrower.

When Does a Variable APR Change?

Like fixed APRs, variable APRs may also be found in credit cards and home loans. To figure out when your credit card or home loan may be subject to an interest rate change, you’ll need to look in several different places. 

Your cardholder agreement will have an exact list detailing how your APR may change over time with credit cards. There may be special circumstances involved if you sign up for your credit card while under a special promotional APR. In that case, the APR will likely change after the promotional period ends.

With home loans, your APR and its potential variations will be listed on the documents you sign when closing on the house. The same may be true for automotive loans.

Variable APR Caps

While variable APRs have the potential to rise over time, there are certain protections in place to keep borrowers from paying exorbitant fees. These protections come in the form of caps or ceilings on rates that prevent the interest rate from rising too high. Caps come in a threefold structure with an initial cap of 1.5%, a periodic cap of 2%, and a lifetime cap of 10%.

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Pros and Cons of Fixed APRs 

There are many pros and cons to getting a loan with a fixed APR. One of the most significant advantages of a fixed APR is its predictability. Fixed rates do not change over time, so it takes much of the guesswork out of creating your monthly budget. You don’t have to worry about your interest rates changing, so the monthly repayment rate you start with will remain the same over time. You can also predict the exact amount you’ll pay in interest over the lifetime of your loan.

However, there is also a clear disadvantage with fixed APRs in that they have the potential to be much more expensive than variable APRs over time. Because variable rates change with time, they have the potential to start and remain lower throughout the loan’s lifespan, so with a fixed rate, your final expenses may come out at a much higher cost.

Pros and Cons of Variable APRs 

Similarly, variable APRs also have many pros and cons. Variable APRs have a big advantage in that they usually have lower starting rates than fixed APRs. This can result in you paying far less in interest fees over time. In fact, usually, when borrowers apply for a fixed-rate loan, they will be given a set term rate but may also be offered a much lower variable rate as an alternative.

However, while there is potential for great savings with variable rate APRs, there is also a potential danger in that the variable-rate can swing the other way and end up costing you more in the long run–especially if you have longer-term loans.

How Can I Find Out if My Business Loan APR is Fixed or Variable?

Determining whether your loan is fixed or variable can be a very straightforward process. The easiest way to figure it out is by calling your lender and inquiring which loan type you have. If that doesn’t work or isn’t convenient for you, you can also check the paperwork and disclosures you received after you received your loan, including the closing paperwork and promissory notes.

How to Choose if a Fixed APR Loan or a Variable APR is Better for My Business

Fixed and variable APRs both have many benefits and disadvantages. Each has the potential to work very well for small businesses, but one may be better suited for your specific needs than the other. 

For example, if you need a longer-term loan and prefer the stability of knowing exactly what you’re going to be paying at all times with no interest rate surprises, a fixed APR may be the better option for you. Fixed rates work exceptionally well for stable businesses that have a steady cash flow and can meet higher monthly payments.

However, if you’re borrowing a smaller amount and can pay off your loan at a faster rate, variable APRs may be better for you. Those with steady incomes may have an easier time paying back loans with variable rates because they will be better prepared to adjust if the rate increases over time. These rates are riskier over time, but they usually have built-in caps that will limit just how high your rates can climb.

Where Can I Get a Business Loan Quote?

There are a few different ways to get quotes for fixed and variable APRs. Many online lenders offer free calculators to help you determine potential monthly or quarterly repayments. You can also receive quotes from bankers and other lenders in-person by visiting their respective establishments. 

Fundid Capital

At Fundid, we have a simple, streamlined process by which you can quickly apply for a loan if it’s right for you and see your potential rates. Most of our rates have fixed APRs that save you much of the hassle of calculating your monthly repayment expenses, and we help walk you through all of the details upfront, so you don’t have to worry about any surprises.

Choose Your Funding Today!

Fixed and variable APRs each have many benefits that can help your business take off, and choosing the right one for you can make all the difference.

If you need funding to help grow your business, check out Fundid Capital to find out how you can get capital to grow even faster today!

Fundid Capital

About Fundid

Fundid is driven by a mission to empower business owners on their growth journeys by simplifying business finance & access to capital. 

We spend our time thinking about what the world would look like if the 80% of businesses that have under 10 employees had access to the capital they needed to grow and thrive. We're solving this with our Business Capital, Business-Building Card, and Resources that include our business Grant Match Program.

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