Answer:
Suppose Demarco and Tanya are being given three offers.
1: $25000 for 10 years at a fixed rate of 2.5%
2. $25000 for 3 years at an adjustable-rate 3%
3. $25000 for 8 years at an adjustable-rate 3.2%
Now suppose Demarco wants to get the loan for the short term, and Tanya wants to get the loan for the long term. Also, Demarco can pay any amount of EMI, and Tanya can pay limited money as EMI.
Demarco will choose a short term loan, as he has the money. However, he might need it for a certain period. And if it is 3 years, then he will look for lower interest rates. And fixed rates are always more than adjustable interest rates. Always keep this in mind. Also, the adjustable interest rate is always good for the short term, as there is a risk involved. If the interest is required for the long term then in future the adjustable interest rate can go as high as 14-15% or even 25% as it is in Kenya currently as it depends upon the economic condition of a country. However, the fixed interest rate always remains the same, and it does not depend upon the economic condition of a country. Once approved it remains the same all the time. Hence, Demarco or Tanya will look for adjustable or fixed based depending upon the term of the loan, and accordingly, they will select in between adjustable and fixed rate. And then they will look at the interest rates. And this debate becomes very important if the loan is required for a certain time which can be unbearable at times. The only thing to keep in mind is the meaning of the adjustable-rate and fixed rate. The rest terms are easily understood.
Explanation:
The answer is self explanatory.
