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.. You're told that you have access to an adjustable-rate personal loan. You learn that the initial interest rate will be set in stone for a specific period of time, and that sounds good to you. However, once that period of time is up, the interest rate on the loan 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 adjustable-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.
Note: Even if a borrower plans to come out on top by keeping an adjustable-rate loan for a short time, it only works if their lender does not charge an early payoff fee.
Instead, you opt for a fixed-rate loan. Your credit score is high, so you lock in a decent interest rate and feel good about the decision. You know exactly how much the annual percentage rate (APR) on the loan 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
- 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 nervous borrowers
Cons
- If market interest rates drop while repaying your loan, you're stuck with the same higher rate