What Is a Fixed Rate Loan?

When you’re looking into getting a line of credit, you might get confused by some of the terms used to describe them. Your lender might discuss “fixed rate loans” and “variable rate loans,” and if you’re pretty new to borrowing money, you might not have any idea what those phrases actually mean. It’s important to understand what they mean because the type of rate you receive could have an impact on the total amount you end up paying back for what you borrow as well as your monthly payment.

What Is a Fixed Rate Loan?

In most cases, a fixed rate loan is a good option. This is because a fixed rate means that the interest rate you get is locked in for the life of the loan. While it may go down, it will never go up. So if you’re taking out a $25000 personal loan at eight percent fixed rate interest, you’ll never have to worry about your interest going above that even if the market fluctuates. Your rate is locked in. However, your rate may drop below eight percent if the market decreases. This would, of course, be a good thing. It’s a little difficult to get fixed rate loans — especially if you have bad credit — but with a little shopping around, you may be able to find a lender who will offer one.

What Are Variable Rate Loans?

A variable interest rate means that the rate can change. This is only a good thing if your rate goes down. Unfortunately, it can also easily go up. So if you borrow some money at ten percent interest, it could jump up to any rate higher than that if the market changes. Borrowing money at a variable rate of interest is a little riskier because it can be tricky to predict what will happen with your interest rate. If your rate goes up, you could end up paying back much more money on your loan that you originally anticipated. Variable rates are particularly common with credit cards, which is probably one reason why so many people get in over their heads with them.

Home Loans: Variable vs. Fixed

Because home loans tend to stretch out for many years, sometimes up to 30 and 40 years, you definitely want to try to get a fixed rate mortgage. This is especially true if your income is not high enough to be able to handle a sudden monthly payment increase, which would be likely to occur when rates rise. If a variable rate is all you can qualify for initially and you can’t or don’t want to put off purchasing a home, you can try to switch later on. According to Investopedia, variable interest rates may be a good thing if it’s a sure bet that interest rates are on the verge of decline, but if you’re a new homeowner with limited income, it’s probably best to play it safe.