Fixed vs variable personal loans in Australia: certainty, flexibility and early payout costs

A fixed-rate personal loan locks in your interest rate and repayment for the whole term, so you know exactly what you will pay, but it often charges an early repayment or break fee and may limit extra repayments. A variable-rate personal loan can move up or down during the term, usually because the lender changes its pricing after shifts in the Reserve Bank cash rate or funding costs, but it more often lets you repay early or make extra repayments without penalty. Choose fixed if a predictable budget matters most; choose variable if you expect to pay the loan off early and can absorb a higher repayment.

This guide is part of the personal loan requirements and comparison rates overview. Figures are illustrative.

How each type works

Personal loans are usually fixed for the full term, unlike home loans where a fixed period often ends and reverts to variable. Check the contract to see whether a "fixed" product is fixed for the whole loan.

What happens to a variable loan when rates rise

The National Credit Code requires the lender to tell you about an interest rate change. For a variable rate, notice can generally be given no later than the day the change takes effect, often through a written notice or an advertisement followed by details in your next statement. Your repayment then changes to keep the loan on track to finish at the original end date (or, with some lenders, the term changes instead). Read the variation clause in your contract.

Worked example (illustrative)

Borrow $15,000 over three years.

• Fixed at 10.5%: repayment about $487.54 a month for 36 months. Total repaid about $17,551.
• Variable starting at 9.5%: repayment about $480.49 a month. After 12 months the balance is about $10,465. If the rate then rises to 11.5% for the remaining two years, the repayment becomes about $490.18. Total repaid about $17,530.
• If the variable rate had stayed at 9.5% throughout, total repaid would be about $17,298.

In this example the variable loan still ends up slightly cheaper even after a 2 percentage point rise, because the rise came after a third of the loan had been repaid. A larger or earlier rise would reverse that. The point is not which wins, but how much your repayment can move and whether your budget can absorb it.

Early repayment fees on fixed loans

When you take a fixed-rate loan, the lender may arrange matching fixed funding. If you pay out early and rates have fallen, it can lose income, so many fixed personal loans have:

• a flat early repayment fee, or
• a break cost calculated from the change in rates and the time remaining, or
• a sliding fee that falls in the later years of the term.

Under section 78 of the National Credit Code, a court can annul or reduce an early termination or prepayment fee that is unconscionable. ASIC's guidance treats such a fee as unconscionable if it exceeds a reasonable estimate of the lender's loss from the early repayment, including its average administrative costs. That does not mean every early fee is unlawful; it means the fee must bear a relationship to the lender's loss.

Illustrative break cost check: after 18 months on the fixed loan above, the balance is about $8,087. If wholesale rates for the remaining 18 months had fallen by 1 percentage point, a rough upper estimate of the lender's loss would be $8,087 × 1% × 1.5 years ≈ $121, and the real figure would usually be lower because the balance keeps falling. A fee far above that kind of figure is worth querying. The lender should explain the basis in writing.

Extra repayments

• On variable loans, extra repayments go straight off the balance and reduce interest. Some lenders let you redraw them.
• On fixed loans, lenders may allow extra repayments up to a cap per year without a fee, or none at all.
• Check whether extra repayments shorten the term or reduce later repayments.

See paying off a personal loan early for the arithmetic.

How to choose

Ask yourself:

1. Could my budget cope if the repayment rose by 5–10%? If not, a fixed rate may suit.
2. Do I expect to repay early from a bonus, tax refund or sale? If yes, check variable loans or fixed loans with no early fee.
3. What is the gap between the fixed and variable comparison rates? A small premium for certainty may be worth paying.
4. What does the contract say about fees for leaving early? Get it in writing.
5. How long is the term? Over one or two years, rate movements matter less than fees.

Compare your scenarios with the personal loan repayment calculator: run the variable option at today's rate and again at a rate 2 percentage points higher. Then see how fees affect the result in the fees guide and the comparison rate guide.

Frequently asked questions

Can a lender change a fixed rate during the term?

Not normally. A fixed rate is fixed for the period stated in the contract. Read the contract to confirm the fixed period covers the full term and what happens if you default.

Are variable personal loan rates tied to the RBA cash rate?

Not directly. Lenders set their own variable rates, and cash rate changes are one input along with funding costs and competition. Some lenders pass on changes to personal loans more slowly or not at all.

Is a fixed personal loan always more expensive?

No. Sometimes fixed and variable rates are close or the fixed rate is lower. Compare the comparison rate and total repayable for both at your amount and term.

Do I need to give notice to repay a fixed loan early?

Some contracts ask for notice or require you to request a payout figure first. Ask for a written payout figure that shows any early repayment fee before you pay.

Sources and where to check

• ASIC Moneysmart — personal loans and choosing fixed or variable
• Federal Register of Legislation — National Credit Code, including s 78 on unconscionable fees
• Reserve Bank of Australia — cash rate decisions
• Australian Financial Complaints Authority — disputes about fees and rate changes