Variable rate loans typically have a 1)________ interest rate than fixed rate loans because with variable rate loans, the borrower assumes the risk that the interest rate might 2)_________.
a. Higher, Increase
b. Lower, Increase
c. Higher, Decrease
d. Lower, Decrease
I pick c.
The answer is b.
The correct answer is c. Higher, Decrease.
Variable rate loans typically have a higher interest rate than fixed rate loans because with variable rate loans, the borrower assumes the risk that the interest rate might decrease. This means that if interest rates decrease over time, the borrower may benefit by paying less interest on their loan. However, if interest rates increase, the borrower may end up paying more interest.
To arrive at this answer, you can understand the key concepts involved. Variable rate loans have interest rates that fluctuate over time based on specific factors such as changes in market conditions or benchmark rates. This means that the interest rate can go up or down. In contrast, fixed rate loans have a predetermined interest rate that remains unchanged throughout the term of the loan.
By recognizing that variable rate loans come with the risk of interest rates decreasing, you can conclude that the interest rates on these loans are typically higher compared to fixed rate loans. This compensates the lender for the uncertainty involved with variable rates.