When you hear about hybrid loans, home mortgages probably come to mind first. And for good reason: hybrid mortgages are a common type of hybrid loan. But they’re not the only kind. Below, we’ll dissect what a hybrid loan is, where they pop up, and why you might be interested in applying for one.
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What is a hybrid loan?
Also called adjustable loans, a hybrid loan is any loan that combines fixed and variable rates into one loan. With a fixed-rate loan, you pay the same interest rate for the life of the loan. By contrast, a variable-rate loan’s interest rate may fluctuate with market conditions. But in a hybrid loan, these don’t occur at the same time. Typically, a hybrid loan begins as a fixed-rate loan. Then, at a predetermined date – five years, for instance – the rate will transition over to a variable schedule.
Pros and cons of hybrid loans
Hybrid loans may let you capture the best perks of both fixed- and variable-rate loans. However, they may also carry downsides for you.
Pros of hybrid loans
- Often come with low introductory interest rates
- Possibly lower initial interest rate than with traditional fixed-rate loans
- Payments may go down if the market rate drops
- Potential for lower interest rates compared to traditional loans
Cons of hybrid loans
- Your variable rate may be much higher than the fixed rate if the market rate increases dramatically
- Harder to budget and plan for repayments with variable rates
- The fixed rate portion of the loan won’t go down even if the market rate declines
When should you use a hybrid loan?
As we mentioned above, hybrid loans typically show up as home mortgages. But in recent years, other kinds of hybrids have popped up, particularly student loans. A few select lenders also offer hybrid personal loans.
Typically speaking, a hybrid loan makes sense if you:
- Plan to refinance your loan when the variable rate kicks in
- Think you’ll repay the loan early
- Want to secure the low introductory rate when your loan balance is highest
If you consistently make your payments during the fixed-rate period of the loan, you may be able to increase your credit score, too, before the variable rate begins. In that case, it might make financial sense to refinance the loan when the variable-rate portion begins, as long as you think you might qualify for a fixed-rate or variable loan rate that is lower than your current mortgage.
A hybrid loan might fit your needs, but it’s smart to carefully consider the requirements of any loan you take out to make sure you can make the monthly payments. Keep track of the timeline of a hybrid loan so you aren’t surprised by an increase in the interest rate down the line.
Credit Builder Plus to boost your credit score
Maybe you want to work on your credit score first before applying for a mortgage or any loan. For just $19.99 per month, you can get access to a Credit Builder Plus loan that can help build your credit score. The membership also offers other perks, including these:
- Competitive interest rates
- No hard credit checks
- Access to a portion of your funds upfront
- Monthly payment reporting to the three major credit bureaus
- Credit monitoring and progress tracking tools
- Up to $300 in InstacashSM advances
More than half of Credit Builder Plus members see their scores increase by 42+ points within 60 days.1
So research a Credit Builder Plus loan today. You want all the information you need before you decide on a hybrid or any type of loan.