Fixed Interest Rate
Fixed interest rate summary:
A fixed interest rate is an interest rate that remains unchanged for a specific period of time.
On a fixed-rate loan, the rate is fixed for the life of a loan.
Before borrowing, find out whether your interest rate could change at any time during the loan's term. And know when and how the rate can change to avoid being caught off guard.
Fixed interest rate definition and meaning
A fixed interest rate is one that doesn't change for a specific amount of time.
Loans that have this feature for their entire terms are called fixed-rate loans. Most personal loans have a fixed interest rate. After the loan is finalized, the interest rate stays the same until the loan is paid off. A fixed interest rate removes unpredictability and could help you budget. Car loans also typically have a fixed interest rate. Some home equity loans have fixed rates, but not all of them.
Key concept:
An interest rate that stays the same during a set time.
More about fixed interest rate
Most mortgages, home equity loans, personal loans, and auto loans have fixed rates for their entire terms. This means their principal and interest payments also stay the same, which makes budgeting easier. You know what the payments will be, month after month.
Other types of loans may have a fixed interest rate for some months or years, and then their interest rate becomes variable. This means it could change, and your payment could change with it. For example, a 5/1 adjustable-rate mortgage has a fixed interest rate and payment for the first five years. After that, the rate could change once a year for the next 25 years.
A fixed-rate HELOC (home equity line of credit) has an interest rate that doesn’t change, but the payment amount could fluctuate depending on your balance. That’s because on a HELOC, you can borrow, repay, and borrow more as often as you like (up to your limit) during the first few years of the loan (the draw period). Once your draw period ends, you’ll enter the repayment period. You can’t borrow more. Your payment will be set at an amount that will fully pay off the loan by the end of the loan term.
Fixed interest rate: a comprehensive breakdown
Most consumers prefer fixed interest rates because of their predictability. Loans with fixed interest rates have fewer moving parts and are much easier to understand.
To calculate the payment for a fixed-rate loan, you only need three numbers: the interest rate, the loan amount, and the loan term.
To find out how much interest you'll pay over the whole loan term, you could do this:
Multiply your monthly payment by the number of months in your loan term
Subtract the amount borrowed
For a $10,000 personal loan with a five-year term, your payments and total interest could look like this:
Rate | Payment | Total Interest |
|---|---|---|
10% | $212 | $2,748 |
12.5% | $225 | $3,499 |
15% | $238 | $4,274 |
17.5% | $251 | $5,073 |
You could also use an online loan calculator that does the math for you.
Loans with fixed interest rates have pros and cons. When interest rates are low, fixed-rate loans are popular because people want a low rate for as long as possible. When interest rates are higher, people begin turning to variable loans because their rates are lower than loans with fixed rates.
Fixed-rate loan pros
Loans are easier to understand and costs are easier to calculate
Fixed payments make budgeting easier
Borrowers are protected from interest rate increases
Fixed-rate loan cons
Interest rates could be higher compared to the starting rates on adjustable-rate loans
If rates drop, you’d have to refinance your loan (pay it off with a new loan) to get the lower rate
Fixed Interest Rate FAQs
What’s the payment on a $100,000 HELOC?
The monthly payment on a $100,000 HELOC is $888, assuming you have a 30-year repayment term and an interest rate of 10%. If your interest rate is 12%, your payment would be $1,042.
Interest rate and payments are for illustration only. Individual results vary. This example uses the Actual 360 interest calculation method.
How can you lower your interest rate without refinancing?
You may be able to lower your interest rate simply by asking your lender for a discount. They may agree to offer a reduced rate if you have a good credit history and can demonstrate your ability to repay the loan on time. You could also enroll in autopay to get a rate discount if your lender offers that benefit.
What is the difference between the interest rate and the APR?
The interest rate is the cost of borrowing money. APR, or annual percentage rate, includes the interest rate and any fees or costs of a loan. An APR is higher than an interest rate if fees are involved.
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