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Fixed Interest Rate

February 5, 20233 min read

{noun} An interest rate that remains the same for a set time, usually for the life of the loan.

An interest rate that remains the same for a set time, usually for the life of the loan.

What Is a Fixed Interest Rate?

A fixed interest rate is an interest rate that remains the same for a set time, usually for the life of the loan. With fixed-rate financing, borrowers can enjoy payment stability and avoid the risk of a variable interest rate—which may increase substantially over time, especially in rising interest rate environments.

How Do Fixed Interest Rates Work?

When you take out a loan with a fixed interest rate, your loan terms will define the fixed rate period.

Generally, for financial products like fixed rate mortgages and personal loans, your interest rate will remain the same throughout your loan term, as will your monthly payment amounts.

For financial products such as adjustable rate mortgages, the interest is variable, which means it can change periodically. Often, an adjustable rate mortgage (ARM) will have an initial period where the rate is fixed. After the fixed period, your interest rate may stay the same or it may adjust based on prevailing interest rates at the time.

What Is the Difference Between Fixed and Variable Interest Rates?

Fixed interest rates generally won’t change—either for the life of your loan or during a predetermined fixed period. In contrast, variable interest rates fluctuate based on market conditions and may change at any time.

What Benefits Do Fixed Interest Rates Offer?

Having a fixed rate loan offers several benefits for your finances.

  • Financial Predictability. A fixed interest rate makes it easier to plan your finances since your monthly payments don’t fluctuate over the fixed period, usually the life of the loan. Such predictable payments can help you more easily manage your budget and alleviate stress.

  • Eliminate Interest Rate Risk. With a fixed interest rate, you don't have to worry if interest rates start to increase in a volatile economy. Compared to loans with variable rates, a fixed-rate loan with a lower interest rate could save you money in a rising interest rate environment.

  • Potentially Lower Borrowing Costs. With fixed-rate loans, you’ll know your total borrowing costs—including interest and fees—before you sign your loan documents. With variable-rate loans, it’s difficult to calculate your total borrowing costs since your interest rate may change substantially over time.

What Are the Drawbacks to Fixed Interest Rates?

While a fixed interest rate can help you plan your finances for the long term, there are a few drawbacks to consider.

  • Potentially Higher Rates. Adjustable-rate financial products often have lower interest rates for an initial, introductory fixed period which may temporarily lower your cost to borrow. Fixed-rate products don’t offer such “teaser” rates.

  • Risk in Decreasing Interest Rate Environments. If interest rates start going down, you may end up paying more to borrow on a higher interest rate than if you took out a new loan.

  • Refinancing Costs. Even if you decide to refinance to get a lower rate, refinancing costs may outweigh the savings you may realize, and the process can be time-consuming. It’s important to compare the total cost of borrowing of your existing versus a potentially new loan before making a decision.

What Can You Do to Get a Good Fixed Interest Rate?

Generally, having a high credit score and a demonstrated track record of responsible debt management can help you land a lower fixed interest rate. In contrast, if you have a low credit score and a spotty history of on-time payments, the lender may view you as a higher-risk borrower and may not offer you the best fixed interest rate they have available.

Can You Switch from a Variable Interest Rate to a Fixed Interest Rate?

In most cases, you can't switch from a variable to a fixed interest rate on an existing loan. While you may be able to refinance your loan—either with your current lender or a new one—and move to a fixed-rate loan that way, it’s important to consider how well you would be able to cope with economic uncertainty. A low variable rates may be tempting initially, but should economic conditions sour and rates begin to rise rapidly, it may be difficult to find a good fixed rate when you want one. Or you may experience an unexpected obstacle, like job loss, that could make refinancing into a fixed interest rate loan difficult.

Are Credit Card Interest Rates Fixed?

Generally, credit card interest rates are variable, not fixed.

Are Student Loan Interest Rates Fixed?

It depends on the type of student loan. Student loans like Perkins Loans and PLUS Loans have fixed interest rates. Many other direct federal student loans—both subsidized and unsubsidized—have fixed rates as well.

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