You may be able to choose from a fixed or variable-rate loan. This is because the prime rate and other index rates can change during the loan term. Understanding how a fixed rate works will help you choose the right rate for financing and repayment terms.
Fixed interest rates may be possible for various loans such as student loans, mortgage loans, and home equity loans.
There aren’t many credit cards that offer a fixed rate of interest. Revolving credit cards typically charge a variable rate of interest.
Continue reading to find out how fixed interest rates work and what their pros and cons are.
What is a fixed interest rate?
Fixed-rate financing means that your loan’s interest rates won’t change over the term of the loan. This means you will know exactly what each monthly payment will be and how much you will pay to repay the loan.
A variable interest rate on the other hand can fluctuate and affect your monthly payments, decreasing or increasing the amount. Variable rates are unpredictable and you don’t know when your monthly payments will change or increase over the term of the loan.
Fixed and variable are not always available options. Federal student loans that were borrowed after July 1, 2006, have fixed interest rates. Private student loans, however, may have a fixed or variable interest rate. This could affect your monthly payments.
Is it possible to switch between a variable and a fixed rate of interest?
You may be able, depending on the lender and type, to refinance your loan from variable to fixed interest rates or vice versa. Refinancing from a variable to a fixed interest rate at low-interest rates can help you lock in a lower interest rate.
Before you agree to terms, lenders must tell you whether the interest rates on a loan are fixed or variable. You can check the original loan documents to find out what your terms for an existing loan are.
The pros and cons of a fixed rate
Fixed-interest rate loans have the advantage of not being affected by changes in market conditions or any increase in other index rates.
This works in the opposite direction, however. The interest rate on a fixed-rate loan will remain the same regardless of how the index rates fall or whether your lenders lower their variable rates.
You should be aware that a lender may alter your fixed rate in certain circumstances. Therefore, you will need to carefully read and fully understand your loan terms and conditions. Your lender will usually notify you before changing a fixed rate.
David Rewcastle of Darien, Connecticut, is an Equity and Fixed Income Analyst with a background in Finance and Middle East Studies