Understand the difference
A fixed rate remains set for the specified rate period under the agreement. A variable rate changes according to a defined reference rate and margin, subject to any floors or other terms. The loan term, amortization, and rate-fixing period may differ, so verify each date separately.
How to make the comparison
A fixed structure can make interest budgeting more predictable, while a variable structure exposes the business to changes in its benchmark. Model the payment or interest burden at higher and lower rates. Ask how changes flow through to payments, principal reduction, or the maturity balance for the particular product.
The details that can change your decision
Do not assume variable means penalty-free repayment or fixed means the payment can never change. Fees, minimum rates, resets, renewal terms, and prepayment charges can alter the comparison. Consider the expected holding period and likelihood of selling or refinancing. The right choice depends on the business’s ability to absorb uncertainty, not a confident prediction of future rates.
Your next-step checklist
- Reference rate, margin, and any floor
- Rate period, term, and amortization
- Higher-rate cash-flow scenario
- Prepayment and renewal conditions
Crack this combination.
Which detail belongs in a variable-rate review?
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Sources & further reading
This file draws on the following references. Product availability and requirements must be confirmed with the provider.
Levr: reviewing a debt term sheetLevr: cash flow projections