What is a fixed interest rate?
A fixed interest rate is a rate that stays the same for the life of the loan. No matter what happens with the economy, your interest rate never changes, so your loan payments stay the same every month. Most of the best personal lenders offer fixed rate loans. If you are someone who appreciates stability and likes knowing what to expect from month to month, a fixed interest rate may be the best option for you.
Let’s say you’ve decided to renovate your home and need a personal loan to make it happen. As a borrower, you have decisions to make. You are told that you have access to an adjustable rate mortgage (ARM). You learn that the initial interest rate will be frozen for a specific period of time, and that sounds good to you. However, once this period has elapsed, the interest rate of the loan will be periodically adjusted. Depending on market developments, the interest rate may be adjusted upward or downward. And that makes you nervous. You want to know for sure how much your loan rate and monthly payment will be over the life of the loan. While an ARM – also known as an adjustable rate home loan or variable rate loan – might be perfect for a borrower who plans to only hold the loan for a short period of time, you are not sure if you can repay the loan until after. when the final payment is due.
Instead, you go for a fixed loan. You have a high credit score so you get a low interest rate and you feel good about your decision. You know exactly how much the annual percentage rate (APR) of the loan will be, you are perfectly clear on the amount of your monthly loan payments and you have already developed a repayment plan that will allow you to pay the loan balance in advance. .
While a fixed rate loan is perfect for you, another borrower may feel better served by an adjustable rate loan. Maybe they don’t believe they’ll carry the loan long enough to worry about paying a higher interest rate when the introductory rate expires. Maybe they can easily afford the payment, even when rising interest rates result in a higher monthly payment. To learn more about adjustable rate loans and whether they are right for you, see our guide to adjustable rate personal loans.
Advantages and disadvantages of a fixed rate loan
Here we take a look at what’s good (and bad) about fixed rate loans.
- The interest rate stays the same
- Monthly payment stays the same
- Easier to budget every month
- A fixed interest rate loan can cut sleepless nights for low-risk borrowers