The Definition Of Fixed Rate Interest
When looking for a loan, you’ll encounter an overwhelming amount of terms and phrases. Loans are offered in all shapes and sizes and they can span over a few months to multiple years. The best tool you can arm yourself with to navigate this process and ensure you remain financially empowered is knowledge.
One term you’ll encounter again and again when looking for a loan is a fixed interest rate. If you don’t have much experience with loans, the definition of a fixed rate is probably lost on you. This rate is when interest doesn't fluctuate during the period of your loan.
How Does A Fixed Interest Rate Work?
Fixed rates are especially attractive to borrowers who can manage to secure them when rates are particularly low. This helps to control the amount of interest you pay and helps to ensure you can remain on top of your monthly payments. If your rate is fluctuating, then it can be more difficult to manage and meet monthly payments. That said, it’s possible that a fixed rate can be higher than a variable rate.
If you secure a loan with a fixed rate, then the rate on your loan will remain the same throughout the loan's lifetime. Many people will find this comforting because it gives them more stability when planning their budget and future expenses. This type of rate will also help the borrower avoid the risk of a mortgage or loan payment increasing over time.
Differences Between Fixed And Variable Interest Rates
The most obvious difference between a fixed interest rate and a variable rate is that one remains constant (fixed) and the other changes (variable). As a borrower with a variable rate, you’ll most likely receive an introductory rate once you close on a loan. That introductory rate will be set over a specific period of time, most likely one to five years. After that, the interest rate will be adjusted periodically.
Another difference between these two types of rates is how much you pay over the lifetime of your loan. In addition to the dollar amount, interest is added to your monthly payments. These two factors, and any additional fees, are what make up your monthly payment. While a fixed rate can help you budget, it could also be the more expensive option, although this isn’t always the case.
How To Decide What Kind Of Rate Is Right For You
Knowing what kind of interest rate is right for you will take some work on your part. Sometimes the best way to know if you’re getting a good rate on your loan is to understand the overall financial market. During certain economic periods, low fixed interest rates are offered. When this occurs, many borrowers jump at the chance to secure a low rate.
You’ll also need to look critically at your financial situation and consider your financial future. When taking out a personal loan, consider all expenses like costs related to your kids, home renovations, and emergencies. Understanding your budget will help you understand what you can afford for your monthly payments.
Advantages And Disadvantages
One of the largest advantages of a fixed interest rate is that it’ll never change. This rate is constant and you can count on it, plan it, and feel secure with it. A disadvantage is that it could end up being more costly than a variable rate loan, which tends to start off with very low and attractive rates.
Bottom Line
Do your research when considering what kind of loan is right for you. The most important factor to remember is that you must pay back this amount and avoid default.
