Interest rates are a key component of many financial transactions, including securing a mortgage or building savings in a bank account. Whether you’re a borrower or investor, understanding the dynamics of interest rates can help you make savvy financial decisions that fit your goals and budget.
The difference between a fixed and variable rate is a critical part of how loans work, influencing everything from your monthly payments to the total amount you’ll end up paying. Learn about the pros and cons of each to find out which type of loan is right for you.
Generally speaking, fixed interest rates are higher at the outset than their variable counterparts. This is because lenders take on a little more risk by agreeing to a fixed interest rate, so they may require a higher initial interest rate to offset their potential loss if market rates rise in the future. A fixed rate, however, means that you’ll pay a consistent monthly payment for the life of your loan.
Similarly, a variable interest rate can increase or decrease based on the market’s overall direction and the economy’s status. This is why some people prefer to have the flexibility of a variable rate, especially if they believe they’ll be able to pay off a portion of their debt before rates potentially rise too high for them.