Which of the following is a drawback of variable interest rates for borrowers?
a. variable interest rates are predictable and harder for borrowers to budget for
b. variable interest rates are initially higher than fixed interest rates
c. variable interest rates can increase until the borrower can no longer afford them
d. variable interest rates can decrease and save borrowers money
c. variable interest rates can increase until the borrower can no longer afford them
The correct answer is c. variable interest rates can increase until the borrower can no longer afford them. This is a drawback of variable interest rates because borrowers may face difficulty managing their repayments if the interest rates rise significantly over time.
To determine the drawback of variable interest rates for borrowers, let's examine the options provided.
a. Variable interest rates are predictable and harder for borrowers to budget for: This statement is incorrect. Variable interest rates are actually unpredictable, meaning they can fluctuate over the loan term. Therefore, it doesn't accurately address the drawback.
b. Variable interest rates are initially higher than fixed interest rates: This statement is also incorrect. Variable interest rates are typically lower in the beginning compared to fixed interest rates, although they can increase later. Hence, it doesn't accurately address the drawback.
c. Variable interest rates can increase until the borrower can no longer afford them: This statement accurately represents a drawback of variable interest rates. As the name suggests, the interest rates can vary, and there is a possibility that they may increase over time. This increase can lead to higher monthly payments, potentially making it difficult for borrowers to repay their loans.
d. Variable interest rates can decrease and save borrowers money: This statement is true, but it does not represent a drawback. Variable interest rates have the potential to decrease, which can benefit borrowers by reducing their monthly payments and saving them money.
Considering the above options, the correct answer to the question is c. Variable interest rates can increase until the borrower can no longer afford them.