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Personal Loan Interest Rates: Fixed vs. Variable

Are Personal Loan Interest Rates Fixed or Variable? What Is the Difference?
Kim Franke-Folstad
Kim Franke-FolstadUpdated February 8, 2024
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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.
Personal loan interest rates can be fixed or variable. While fixed rate personal loans are more common, it’s possible to find a personal loan with a variable interest rate.A fixed rate loan has the same interest rate for the entire borrowing period, while a variable rate loan has an interest rate that changes over time. Which one is better will depend on several factors, including the loan term, whether interest rates are expected to rise or fall, the flexibility of your budget, and your tolerance for risk.In this guide, we’ll look at the differences between fixed vs. variable rate personal loans, how the interest is calculated, and the benefits and drawbacks of each type of loan.

What Is a Fixed Rate Personal Loan?

With a fixed rate personal loan, the interest rate remains the same for the entire repayment period, no matter what market interest rates do. Once the rate is locked in, borrowers know precisely how much total interest they’ll pay for the loan. Because personal loans are installment loans (meaning you pay them back in installments over a set period of time), a fixed rate allows you to have standardized monthly payments that will stay the same for the life of the loan.

How a Fixed Rate Loan Works

The interest rate on a fixed rate loan is based on the current market interest rate, plus or minus a margin that is based on the creditworthiness of the borrower. If interest rates are relatively low, but are expected to increase, you may want to lock in your loan at a fixed rate.A fixed rate loan also offers predictability since you’ll know at the outset what your monthly payment will be each month and how much you’ll pay in total interest for the loan. If you plan to borrow $10,000 for three years at a fixed rate of 6%, for example, you know your payment will be $304 each month for 36 months. You also know that when you’re done, you’ll have paid a total of $10,951.90. Recommended: What Is an Unsecured Personal Loan with No Collateral? 

What Is a Variable Rate Personal Loan?

A variable rate personal loan is a loan in which the interest rate charged on the outstanding balance of the loan varies as market interest rates change. Because variable interest rate loans are a riskier choice for borrowers, the interest rate will typically start out lower than on a comparable fixed rate loan. However, the rate can fluctuate during the repayment period. As a result, your monthly payments (which include both principal and interest) could increase or decrease during the loan’s term, and the overall cost of the loan could go up or down. 

How a Variable Rate Loan Works

Like a fixed rate loan, the interest on a variable rate loan will be tied to a benchmark, like the federal funds rate (the rate major banks in the U.S. charge each other for overnight loans), plus a margin. While the margin won’t change over the life of the loan, the interest rate can.Unlike a fixed rate loan, the interest rate doesn't get locked in at the current benchmark rate, and can fluctuate as that benchmark rate changes. This means that outside forces — such as inflation, economic growth, and unemployment — can influence the interest rate of your personal loan.If, for example, the Federal Reserve (the “Fed”)  lowers its benchmark interest rate to encourage borrowing and spending, you can expect your loan’s rate — and monthly payment — to adjust downward to reflect that cut. If, on the other hand, the Fed raises its benchmark rate to rein in spending and cool down inflation, your rate and payment will likely go up. You may come out ahead if market rates decrease, but there is risk involved. If interest rates increase significantly, you might find it difficult to make your monthly payments and could end up defaulting on the loan

Pros and Cons of Fixed and Variable Rate Loans

If you’re trying to decide between a fixed or variable rate personal loan, there are a few pros and cons of personal loans you may want to consider.

Pros of Fixed Rate Loans

With a fixed rate loan, your interest rate and monthly payment will remain the same for the life of your loan. For borrowers on a budget and those who like predictability, that can be a big plus. Another advantage of fixed rate loans is that you don’t have to worry about outside factors affecting your interest rate. Even if the benchmark rate or index your loan is tied to goes up, your rate is protected. You can use an online comparison site to review and compare personal loan rates, loan amounts, and repayment terms to know exactly how much the loan will cost.Also, because most lenders offer fixed rate personal loans, you may find there’s a wider range of options to choose from than you would get with a variable rate personal loan. 

Cons of Fixed Rate Loans

The big downside to a fixed rate loan is that the starting rate is usually higher than what you might find for a comparable variable rate loan. For this reason, short-term loans could end up costing more with a fixed rate loan than with a variable rate loan.Also, if interest rates drop during your repayment period, your rate won’t go down the way it would with a variable rate personal loan. Should that happen, you would have to live with the higher rate or look into refinancing with a new personal loan.
Pros of Fixed Rate Personal LoansCons of Fixed Rate Personal Loans
Predictability monthly paymentStarting interest rate may be higher
Your rate won’t go up even if benchmark rate increasesA drop in the benchmark rate won’t lower your rate or payment
Wide availabilityMay not be the best deal for short-term loans

Pros of Variable Rate Loans

Variable rate loans usually have a lower starting rate than fixed rate loans. This can make them appealing to borrowers who are looking for lower payments. If the rate stays the same or drops, you could have a more affordable payment for the length of your loan, and the loan’s total cost could be less than with a fixed rate loan. You also may find that the fees for a variable rate loan are lower than for fixed rate loans. 

Cons of Variable Rate Loans

The main drawback to variable rate loans is that the rate isn’t locked in. If the benchmark rate the loan is tied to goes up, the rate and payments could increase. So, even if the initial rate and payment are affordable, that could change — and the total cost of the loan could end up being more than with a fixed rate loan.The possibility of fluctuating rates also can make it challenging to budget your monthly payments. If you can afford higher payments, that might not be a problem. But if you’re cutting it close and the interest rate goes up, making that larger payment every month could become a struggle.  Also, because fewer lenders offer variable rate personal loans, it may be more difficult to find one that fits your needs.
Pros of Variable Rate Personal LoansCons of Variable Rate Personal Loans
Lower initial interest rateInterest rate isn’t locked in, so payments and overall cost of loan could increase
Interest rate could drop, lowering payments and overall cost of the loanDifficult to budget for changing monthly payments
Fees may be lowerFewer lenders offer variable rate personal loans

Weighing Which Type of Loan Is Best for You

Whether you’re better off with a variable or fixed rate personal loan will depend on several different factors. Here are some things to consider as you shop for personal loans.

When a Fixed Rate Loan Can Be a Good Idea

A fixed rate loan could work for you if …
  • You don’t like surprises. A fixed rate loan is predictable. You’ll know from the start what your interest rate is, what your monthly payment will be, and how much you’ll pay in interest over the life of the loan.
  • You don’t want to stress about what’s happening to interest rates. Your payments will remain the same no matter what’s happening with the economy or economic policy.  
  • You plan on going with a longer loan term. The longer your repayment period, the more likely it is that interest rates could fluctuate during that time. If you’re thinking about a five- to 10-year personal loan, a fixed rate may make more sense. 
  • Interest rates seem to be heading upward. In a rising interest rate environment, it could make sense to go with a more reliable fixed rate loan. 

When a Variable Rate Loan Can Be a Good Idea

A variable rate loan could be a good idea if …
  • You can afford to take a risk. The lower rate you’re likely to be offered with a variable rate loan is a reward for taking a chance that the rate could increase. If you have a flexible budget and can afford to make higher payments should rates increase during the loan term, you might decide it’s worth rolling the dice. 
  • You’re looking for the lowest rate possible. If you’re looking for the lowest rate out there (or, at least, the lowest rate for which you can qualify), it’s likely you’ll find the initial rates for variable rate loans are lower. The question is, will the variable rate remain low? That may depend on how low the starting rate is compared to current fixed rates, and if the rate rises, how quickly and how much it rises. 
  • You’re planning on a shorter loan term. If you expect to pay off your loan quickly — within two to five years — you may not be significantly affected if rates rise a bit. 
  • Interest rates seem to be heading downward. If you believe rates will drop during your personal loan repayment period, you might choose to consider a variable rate loan.
Recommended: How to Calculate the Interest on a Personal Loan

Fixed Rate vs. Variable Rate Personal Loans at a Glance

Fixed Rate Personal LoansVariable Rate Personal Loans
Interest remains the same for life of the loanInterest rate can change based on benchmark rate
No unexpected fluctuations in rate/monthly paymentsMonthly payment can change over repayment term
Generally better for long-term loansInitial rates are typically lower than for fixed rate loans
Most lenders offer fixed rate loansGenerally better for short-term loans

Compare Personal Loan Options

Whether you choose to go with a fixed or variable rate personal loan, the actual interest rate you will pay will depend not just on market rates, but also on the lender, as well as your qualifications as a borrower.If you’re interested in finding out what type of rates and terms you might qualify for, Lantern by Sofi can help. With our simple online search tool, you can quickly review and compare personal loan offers from multiple lenders with just one application and without making any type of commitment.

Frequently Asked Questions

What type of loan is a personal loan?
Are fixed or variable rate personal loans better?
What types of loans have variable interest rates?
Photo credit: iStock/kieferpix

About the Author

Kim Franke-Folstad

Kim Franke-Folstad

Kim Franke-Folstad is an award-winning journalist with 30 years of experience writing and editing for newspapers, magazines and websites. Her work for SoFi covers a range of topics related to personal finance, including budgeting, saving, borrowing, and investing.
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