Fixed Interest Rate

Fixed interest rate summary: 

• When you borrow money, you’re likely to pay interest on it. 

• If you sign on for a loan with a fixed interest rate (such as a mortgage, personal loan, or auto loan), you’ll pay the same percentage of interest over the entire loan term.

• A fixed interest rate is more predictable than a variable interest rate, which could change while you’re still paying off the debt.

Fixed Interest Rate Definition and Meaning 

Different types of borrowing come with different interest terms. Personal loans, auto loans, and many mortgages often come with fixed interest rates—no matter how long the loan term, your rate remains the same. In contrast, credit cards generally have variable rates, which can fluctuate over time based on the economy.

It’s a smart financial decision to learn the terms of your loan before you sign on the dotted line. And with a fixed interest rate, you’ll be able to calculate the total costs of borrowing. 

Real-Life Example of a Fixed Interest Rate

Say you take out a $20,000 debt consolidation loan with a five-year term and a fixed interest rate of 14.99%. Over those five years you’re repaying the loan, you can count on that same 14.99% interest rate. Your monthly payment will be $476 and it won’t change while you pay off the loan.

*In this example, the lender uses simple interest. If the lender calculates interest in a different way, such as with the Actual 360 method, your payment could be different.

Even if economic factors cause interest rates to change, yours won’t. If rates rise, you’ll keep your lower rate. If rates fall, yours won’t go down. No matter what happens, your rate stays steady.

Stability is a key reason people like fixed-rate loans, especially for longer-terms such as a 20-year home equity loan or a 30-year mortgage.

Fixed Interest Rate: A Comprehensive Breakdown

Having an installment loan with a fixed interest rate could be good for your finances, especially if you’re trying to create and stick to a budget. You’ll be able to plan your finances around the same payment amount for your loan every month. 

Having a fixed rate means that your loan isn’t subject to economic ups and downs the way a variable-rate loan would be. 

If you’ve got a fixed interest rate but rates overall are decreasing, you could consider refinancing. That means you would get a new loan at the lower rate and use it to pay off your current loan that has a higher rate. 

Refinancing isn’t free. There are typically loan fees. It’s a good idea to make sure that the lower interest rate will save you more than what you’ll pay to get the new loan.