What It Means
A fixed interest rateInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more is set on the day you take out a loan and stays put for as long as the loan runs. The Consumer Financial Protection Bureau (CFPB) points out what that gives you: before you sign a fixed-rate loan, you can see the payment for every month and the total you'll pay over its life. A variable rateVariable interest rateAn interest rate that can rise or fall over the life of a loan or card because it's tied to an index, such as the prime rate, plus a set margin. See more moves with an index instead, so its payment can rise or fall after you borrow.
Try It: A Fixed Payment Next to a Rate That Rises
A loan at a fixed rate, next to the same loan if its rate rose after the first year. The rise is an example you set.
A rise of points would add to each payment from month 13. The fixed payment stays where it started.
With no rise, both loans cost the same. Only the fixed one is sure to stay there.
How People Say It
- "We locked in a fixed rate for thirty years."
- "I went fixed so the payment can't jump on me."
- "Is that rate fixed, or does it move?"
The Breakdown
Worked example. A $25,000 car loanCar loanAn installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral. See more over 60 months at a fixed 6%, next to the same loan on a variable rate that starts at 6% and rises to 8% after the first year. The rise is an example; a real variable rate follows its own index, margin and caps.
| Fixed 6% | Variable example | |
|---|---|---|
| Payment, months 1 to 12 | $483.32 | $483.32 |
| Payment, months 13 to 60 | $483.32 | $502.42 |
| Total interest | $3,999.20 | $4,915.81 |
What the result means. The fixed borrower knows on day one that the loan will cost $3,999.20 in interest, and every payment is $483.32. In this example the variable loan costs about $917 more because the rate climbed. Had rates fallen, the variable loan could have come out cheaper, which is the trade a fixed rate makes: it gives up any drop in exchange for a payment that can't rise.
Where a fixed rate matters most. The CFPB's auto loan termsLoan termHow long you have to repay a loan, usually stated in months for a car loan and in years for a mortgage. See more note that the longer a loan runs, the riskier a variable rate becomes for the borrower, because rates have more time to go up. A long loan, such as a 30-year mortgageMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more, is where that certainty covers the most months.
Good to Know
On a mortgage, the CFPB explains, a fixed rate is set when you take out the loan and won't change, so the monthly payment and the total cost can be known up front. For credit cards, the CFPB describes a fixed APR as one that doesn't move with an index, which is what separates it from a variable APR; your card agreement sets out the rate terms for your card. Your loan documents say which kind of rate you have. If they name an index and a margin, the rate is variable.
FAQ
Can a fixed interest rate change?
On a fixed-rate loan, such as a fixed-rate mortgage or car loan, the rate set at the start stays for the life of the loan, according to the CFPB. A different rate would come only from a new loan, such as a refinanceRefinancingReplacing a loan you already have with a new one, usually to get a lower rate, a different term or a different payment. See more. For a credit card, the card agreement sets out its rate terms.
Is a fixed rate better than a variable rate?
It depends on what rates do after you borrow and where each loan starts. A fixed rate protects the payment if rates rise, and a variable rate can end up cheaper if they fall. The CFPB notes that a longer loan gives a variable rate more time to climb.
How do I know if my loan has a fixed rate?
Your loan disclosures and agreement show the rate and whether it can change. If the paperwork mentions an index and a margin, the rate is variable and will follow that index.
Do It in Buhata
Bills
With Plus, add the loan payment to Bills with its due date, so the same amount shows up ahead of you every month.
Open BuhataRelated Terms and Categories
- Interest rate
The yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost.
- Variable interest rate
An interest rate that can rise or fall over the life of a loan or card because it's tied to an index, such as the prime rate, plus a set margin.
- Amortization
Paying off a loan through regular scheduled payments, each split between interest and principal, until the balance reaches zero at the end of the term.
- Loan term
How long you have to repay a loan, usually stated in months for a car loan and in years for a mortgage.
- Mortgage
A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.
Sources
Consumer Financial Protection Bureau, "What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?"; CFPB, "What is the difference between a fixed APR and a variable APR?"; CFPB, "Auto loans key terms"
- www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-fixed-rate-and-adjustable-rate-mortgage-arm-loan-en-100
- www.consumerfinance.gov/ask-cfpb/what-is-the-difference-between-a-fixed-apr-and-a-variable-apr-en-45
- www.consumerfinance.gov/consumer-tools/auto-loans/answers/key-terms
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