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What Is a Fixed-Rate Loan?

What Is a Fixed Rate Loan?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated June 17, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A fixed-rate loan is a lending product that allows consumers or businesses to borrow money with an interest rate that does not change over the life of the loan. 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 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 vs. variable-rate loans and highlight key factors that may help you determine your best options for a loan.

Fixed-Rate Loan Definition

A fixed-rate loan is a borrowed sum of money with an interest rate that does not change. The rate is locked or fixed in place for the entirety of the loan. That means the interest rate would remain unchanged.The interest rate and fees — also known as the annual percentage rate (APR) — represents the cost of taking out a loan. Borrowers are expected to repay the principal loan amount and any interest charges and fees owed.Recommended: Understanding Loan Principal

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

Pros and Cons of Fixed-Rate Loans

Fixed-rate loans may carry certain advantages and disadvantages for a consumer. Let’s look at some of the pros and cons:

Pros of a Fixed-Rate Loan

Predictable payments: Your monthly loan payments will remain the same each month during the life of the loan as long as you make regular payments on time. This predictability can help you better manage your finances.Volatility-free: Your personal loan interest rate on a fixed-rate personal loan will remain consistent and unchanged even if market rates go up nationwide.

Cons of a Fixed-Rate Loan

Boxed-in: The interest rate will not decrease even if market index rates go down nationwide.Potentially risky: An interest rate that never goes down can be risky for borrowers. If the fixed rate is relatively high compared with market index rates, the short-term and long-term costs of borrowing a fixed-rate loan could potentially be higher than borrowing money under a variable-rate loan.Recommended: Is Taking Out a Personal Loan Bad?

Variable vs Fixed-Rate Loan

Below we highlight the differences between a fixed-rate loan vs. variable-rate loan:

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, whereas a fixed-rate loan has an interest rate that will never change over the life of the loan. A 0% APR car loan is a car financing agreement with an interest rate fixed at 0%.

Determining if a Fixed-Rate Loan Is 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.The initial interest rate on a variable-rate loan can change in any given month, where the cost of borrowing money can go up or down. You may consider the long-term possibilities when determining whether to choose a fixed-rate loan vs. 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 best accommodate their budgetary preferences and needs. Borrowing money on a fixed 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 run.

Exploring Fixed-Rate Loans

Here are some fixed-rate loans you may consider:

1. Fixed-Rate Personal Loans

A fixed-rate personal loan may help you consolidate debt, including high-interest credit card debt. Personal loans may also help you finance large purchases or pay off medical bills.Recommended: 12 Types of Personal Loans: Pros & Cons of Each

2. Federal Student Loans

Federal student loans disbursed since July 2006 feature fixed rates of interest. 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.

3. Fixed-Rate Auto Loans

Fixed-rate financing can help consumers buy new or used cars. 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. You may need good or excellent credit to qualify for a 0% APR car loan.

4. Fixed-Rate Mortgages

Homebuyers looking for predictability in their monthly housing costs may consider a fixed-rate mortgage loan. The repayment terms of a fixed-rate mortgage can vary by length, including a 30-year term or 15-year term. You may pay more interest over the life of your loan if you choose a 30-year mortgage over a 15-year mortgage.

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.

The Takeaway

There are pros and cons to consider when choosing between a fixed-rate loan vs. variable-rate loan. Borrowing money through a fixed-rate loan has the key advantage of being predictable in the repayment cost schedule, while borrowing money through a variable-rate loan may initially feature a lower rate of interest than comparable fixed-rate loans.If you need fixed-rate funding, Lantern by SoFi can help. All you need to do is fill out a simple form and explore personal loan offers in our marketplace.Compare personal loan rates and apply in minutes.

Frequently Asked Questions

Is a fixed-rate loan better than a variable-rate loan?
Who determines whether an interest rate is fixed or variable?
Is there a limit on how much variable rates can rise?
Photo credit: iStock/MicroStockHub

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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