What Is a Fixed-Rate Personal Loan?

Borrowing money is a big deal. Whether you’re shopping for a mortgage, home equity loan, personal loan, or another loan type, it pays to understand the associated financial terms.

Here, we’re going to cover the time “fixed interest rate.” When you finish reading this article, you should know precisely how a fixed-rate loan compares to a variable-rate loan. The more you understand the terms associated with a loan, the better equipped you are to make the loan decisions that work for you.

What is a fixed interest rate?

A fixed interest rate is a rate that stays the same over the life of the loan. No matter what’s going on with the economy, your interest rate never changes, so your loan payments stay the same each month.

Most of the best personal loan lenders offer fixed-rate loans. If you’re someone who appreciates stability and likes knowing what you can expect from month to month, a fixed interest rate may be the best option for you.

Let’s say you’ve decided to make renovations to your home and need a personal loan to make it happen. As the borrower, you have some decisions to make.

You’re told that you have access to an adjustable-rate mortgage (ARM). You learn that the initial interest rate will be set in stone for a specific period, which sounds good to you.

However, once that period is up, the interest rate on loans will periodically be adjusted. Depending on what’s going on with the market, the interest rate can either be adjusted up or down. And that makes you nervous.

You want to know for sure how much your loan rate and the monthly payment will be throughout the life of the loan. While an ARM — also referred to as a variable-rate home loan or floating rate loan — might be perfect for a borrower who only plans to keep the loan for a short time, you’re not confident that you’ll be able to retire the loan before the final payment is due.

Instead, you opt for a fixed loan. Your credit score is high, so you lock in a low-interest rate and feel good about the decision.

You know precisely how much the annual percentage rate (APR) on loanwill is going to be, are crystal clear as to how much your monthly loan payment will be, and have already come up with a repayment plan that will allow you to pay the loan balance off early.

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.

Perhaps they can easily afford the payment, even when rising interest rates lead to a higher monthly payment. To learn more about adjustable-rate loans — and find out if they’re right for you — check out our guide to adjustable-rate personal loans.

 

Pros and cons of a fixed-rate loan

Here, we take a look at what’s great (and not so great) about fixed-rate loans.

Pros

  • The interest rate stays the same
  • Monthly payment stays the same
  • Easier to budget each month
  • A fixed interest rate loan may lead to fewer sleepless nights for risk-averse borrowers.

Cons

  • If market interest rates drop while repaying your loan, you’re stuck with the same higher rate.
  • You’ll pay less toward your principal (the original amount you borrowed) than you would with an adjustable-rate loan.

Should I get a fixed-rate personal loan?

A fixed-rate personal loan is your best bet if you don’t like financial surprises and want a loan payment (and interest rate) that never goes up.

Whether or not you should opt for a fixed-rate or variable-rate loan depends on how you feel about risk and whether you can afford a higher monthly payment if the interest rate rises.

Today’s interest rates and fixed-rate loans

Deciding if you want a fixed-rate or adjustable-rate loan is made more accessible today by the low average interest rate for personal loans.

When market interest rates are very high, borrowers sometimes opt for an adjustable-rate loan because those loans start with lower interest rates. But right now, market interest rates are low. That means you can get a low-interest rate even if you choose a fixed-rate loan. 

And while we’re on the topic of today’s low-interest loan, it will take time to consider how a fixed rate vs. variable-rate loan applies to other loan types. For example, when you purchase a home, a lender will want to know whether you want a fixed mortgage or a loan with a variable interest rate. The same rules apply:

  • Estimate how long you’ll be in the home
  • Find out if a variable-rate loan comes with a lower interest rate
  • Determine whether you can afford the mortgage payment, even if the mortgage rate increases
  • If you’re uncomfortable with the idea of a floating interest rate and changing monthly payment, you can be confident that a fixed-rate mortgage is a better option.

Take your time to consider if a fixed-rate loan and its predictable payments are the right fit for you. If the answer is yes, you know precisely which loan type to request, even before filling out a loan application. And it pays to be ready. You never know when you’ll need an emergency loan to cover a flooded basement or unexpected medical expenses.

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