A fixed-rate loan is a lending product that allows eligible consumers or businesses to borrow money with an interest rate that does not change over the life of the loan. The rate is locked or fixed in place for the entirety of the loan. That means the interest rate would remain flat and unchangeable. Whether the product is a federal student loan, fixed-rate mortgage, fixed-rate personal loan or any other lending product with a fixed rate of interest, the interest rate would never fluctuate over time.
The interest rate of a loan represents the cost of borrowing money in addition to the principal owed.
The repayment terms of a fixed-rate loan are predictable, unlike a variable-rate loan that carries an interest rate that may suddenly go up or down based upon market conditions. Below we provide comprehensive information about fixed-rate loans versus variable-rate loans and highlight key factors that may help you determine your best options for a loan.
Related: How do I get the best interest rate on a loan?
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Different types of fixed rate loans
Here are the various fixed-rate loans a consumer or business may apply for:
- Fixed-rate personal loans for major expenses
- Federal Direct Loans for students seeking higher education
- Fixed-rate car loans to finance a vehicle purchase
- Fixed-rate mortgages to buy a single-family home
- Fixed-rate loans for small businesses
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Pros of fixed-rate loan
- Predictable payments: Your monthly principal and interest payments will remain the same every month for the life of the loan. This predictability can help you better manage your finances.
- Volatility-free: A fixed-rate loan has a fixed interest rate that will remain flat even if market interest rates go up nationwide.
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Cons of fixed-rate loan
- Boxed-in: The interest rate will not decrease even if market interest rates go down nationwide.
- Potentially risky: A fixed interest rate is not risk-free. If the locked interest rate is relatively high compared with the market index rates, the short-term and long-term costs of taking a fixed-rate loan could potentially be higher than borrowing money under a variable rate loan.
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Variable vs fixed-rate loan
As we mentioned earlier, a loan may include either a variable interest rate or fixed interest rate and the nature of the rate matters:
What Is a Variable Rate Loan?
A variable rate loan is a borrowed sum of money with an interest rate that changes or fluctuates over time. The rate may increase or decrease depending on market conditions.
Differences Between Variable and Fixed-Rate Loans
A variable-rate loan carries an interest rate that may change over time, while a fixed-rate loan has an interest rate that will never change over the life of the loan.
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Determining whether a fixed loan is right for you
Determining whether a fixed-rate loan is right for you may require a personal analysis of your current financial health and outlook. In the area of student loans, the initial interest rate on a variable-rate loan is often lower than a fixed-rate loan term.
As mentioned earlier, the initial interest rate on a variable-rate loan can change in any given month, where the cost of borrowing money through a variable-rate loan can go up or down. Consumers may consider the long-term possibilities when determining whether to choose a fixed-rate loan versus a variable-rate loan.
Although variable-rate loans may include an interest rate cap structure limiting how much the rate can rise or fall, consumers could consider their ability to pay and their long-term fiscal outlook to help determine what loan products may better accommodate their budgetary preferences and needs.
Borrowing money on a fixed interest rate creates a predictable payment schedule, but a fixed-rate loan is not necessarily more cost-effective than a variable-rate loan in the near term or long term because of potential fluctuations in market interest rates.
Your central determining factor might be whether you can afford a higher interest rate now or later, or whether predictability reigns supreme.
Consumers could explore the following fixed-rate options.
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1. Fixed-rate personal loans
A fixed-rate personal loan may help you consolidate debt. This could be particularly helpful for any consumer saddled with high credit card balances. Other reasons to get a personal loan could include financial necessity, such as a consumer facing a costly and unexpected family emergency. Personal loans can help borrowers pay off medical bills and finance large purchases.
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2. Federal student loans
Federal student loans are traditional fixed-rate loans that promote higher education. Undergraduate students with financial need may qualify for Direct Subsidized Loans, while a wider pool of undergraduate and graduate students could qualify for Direct Unsubsidized Loans. The U.S. Department of Education also offers Direct PLUS Loans to eligible parents and graduate or professional students.
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3. Fixed-rate auto loans
Fixed-rate financing can help consumers buy new or used vehicles. Consumers with strong credit histories may qualify for interest-free auto loans, which carry a fixed interest rate of 0% for the life of the loan.
The average credit score for a used vehicle loan rose to 675 in the third quarter of 2021, up from 666 in Q3 2020, and the average credit score for a new vehicle loan increased one point year-over-year, reaching 733, according to Experian’s State of the Automotive Finance Market report released in December 2021.
Another nationwide consumer reporting agency, Equifax, considers any credit score between 660 and 850 to be good, very good, or excellent in its credit scoring model ranging from 280 at the lowest to 850 at the highest.
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4. Fixed-rate mortgages
Homebuyers looking for predictability in their monthly housing costs can consider a fixed-rate mortgage. The repayment terms of a fixed-rate mortgage can vary by length, including a 30-year term or 15-year term.
A shorter mortgage term could be more cost-effective than a longer mortgage term. For example, buying a house with a 15-year fixed-rate mortgage term would generally feature a lower interest rate packaged with higher monthly payments than buying that same house with a 30-year mortgage term and everything else holding equal.
Some lenders may require a down payment as high as 20% of the home’s purchase price for any fixed-rate mortgage product, but other lenders may accept substantially lower down payments for a house financed with a fixed-rate mortgage.
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5. Fixed-rate business loans
The U.S. Small Business Administration has community partners that provide long-term, fixed-rate financing of up to $5 million for major fixed assets under the 504 Loan Program. These fixed-rate loans “promote business growth and job creation,” according to the SBA.
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The Takeaway
There are many loans available with fixed interest rates. Determining between a fixed-rate loan or variable-rate loan may come down to affordability or personal preference. Borrowing money through a fixed-rate loan product has the key advantage of being predictable in the repayment cost schedule, but borrowing money through a variable-rate loan may initially feature a lower rate of interest than comparable fixed-rate loans.
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This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.
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Personal Loan:
SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student Loan Refinance:
SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and Disclosures, Terms of Service, and Privacy Policy.
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 05/01/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from Caribou. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
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