A fixed interest rate is an annual percentage rate (APR) that does not change throughout the entire term of a loan, be it a personal loan or a mortgage. Having a fixed rate can be advantageous for those who want to remove the guesswork from their monthly payments, as it’s easy to determine the long-term costs of borrowing.
When you take out a fixed-rate personal loan, your APR never changes throughout its term.
In contrast, with variable-rate personal loans, the APR changes, which means monthly payments can change.
Getting a fixed-rate loan is beneficial if you want to keep payments simple or if the market’s current interest rates are low.
How Does a Fixed-Rate Personal Loan Work?
Fixed-rate personal loans have interest rates that will not change throughout the term. For instance, if your agreement states that your interest is 5% for five years, your interest will remain as such throughout the five years. That means your monthly payments are fixed as well, making it easier for you to budget, plan ahead and determine the total cost of borrowing.
Aside from the predictability, fixed interest rates can also be beneficial if you manage to get a low offer. Even if inflation occurs or the Federal Reserve raises its benchmark interest rates, the interest rate on your loan will remain the same and unaffected.
Getting a personal loan with a fixed rate can be done through banks, credit unions and online lenders although the requirements to apply for one can vary. Generally, most lenders look to see that you have a credit score of at least 580 to 669 (Fair). But the higher your score is, the better your rates will be. On top of this, lenders also look at your income, debt-to-income (DTI) ratio and more.
Some documents to provide include the following:
- A completed loan application form
- Your proof of identity (driver’s license, passport and other IDs)
- Any income verification document
- Your proof of address (utility bills, etc.)
However, keep in mind that lenders may look for more documents. It’s best to ask what they need to avoid any delays in your application.
If you’re interested in getting a fixed-rate personal loan, it’s important not to opt for the first offer immediately. Below are a few starting points to compare lenders:
- Compare interest rates of variable-rate personal loans: A variable rate can be beneficial in some cases, such as if the interest rates are lower or you anticipate interest rates going lower in the future.
- Opt for flexible payment terms: Some lenders allow you to choose the term length that best suits your needs.
- Assess your ability to repay the loan: It’s important to consider whether you can repay the loan based on the interest rate and the term. You don’t want to take on a loan if your finances are unstable.
- Determine application and funding speed: If you’re in a rush, it’s important to choose a lender whose application period and funding disbursement time are short. Ask ahead to see the estimated time frame of your desired lender.
Differences Between Fixed-Rate & Variable Loans
Next to a fixed-rate loan, there are also loans with variable interest. Variable interest rates are those that fluctuate based on a benchmark or index. Understanding the differences between fixed-rate and variable-rate personal loans — as well as other types of personal loans — is crucial to determine which suits your circumstances best.
A variable interest rate fluctuates based on the lender’s chosen benchmark or index, which is often the London Interbank Offered Rate (LIBOR) or the federal funds rate. That means your payments can change over the course of the term, going higher or lower depending on the index.
If you find this too risky or do not want to deal with fluctuating interest, a fixed-rate loan may be a better option. However, if rates are declining, opting for a variable-rate loan may be a good option and a way to save on interest over the life of the loan.
The length of your term also determines which type of interest is better. If you plan on having a short loan term, you might want to stick to variable interest rates as you might not have the loan long enough to experience extreme fluctuations. On the other hand, if you need to repay the loan over a more extended period, a fixed interest rate might be more attractive to avoid fluctuating interest.
Aside from paying more or less in interest, your repayment changes between a fixed and variable loan. With a fixed-rate loan, your monthly payments stay the same, making it easy for you to budget. On the other hand, variable-rate loans can reduce or increase depending on your lender’s benchmark.
Benefits & Drawbacks of a Fixed-Rate Personal Loan
Having the same monthly payment can make fixed-rate personal loans appealing, but it also comes with downsides. To make an informed decision, you need to understand the pros and cons.
Pros of Getting a Fixed-Rate Personal Loan
- It makes debt management easier: Because fixed rates come with consistent monthly payments, you can plan ahead and budget your finances accordingly.
- It is easy to calculate the cost of borrowing: A fixed interest rate makes it easy to calculate the lifetime cost of borrowing, as nothing changes.
- It may have a lower interest rate: Depending on the market, a fixed-rate loan may be lower and more appealing.
- It is simpler to understand: A fixed interest rate is easier for first-time borrowers to understand, simplifying their monthly expenses.
- It avoids rising rates: The nature of a fixed interest rate means that even if the market turns and interest rates rise, you will not be affected.
Cons of Getting a Fixed-Rate Personal Loan
- It avoids reducing interest rates: If the interest rates on the market are going down, you won’t be able to benefit from it.
- It could cost more over time: If you got your loan during a time when interest rates were high, you might pay more over time if you don’t refinance.
- It comes with higher interest rates: Compared to variable rates, fixed rates often have higher ranges.
When Should You Get a Fixed-Rate Personal Loan?
While its predictability makes a fixed-rate personal loan seem enticing, it may not be suitable for all situations. Knowing when a fixed-rate loan is better can help you maximize your loan and determine a suitable repayment plan.
You have specific, long-term financial goals
If you’re aiming to achieve a long-term financial goal, a fixed-rate personal loan may make it easier to plan ahead. This way, you can calculate exactly how long it will take you to save up.
You prefer stable and predictable monthly payments
Fixed-rate personal loans come with unchanging monthly payments, which is a great idea if you want to simplify your debt repayment plan.
You have the chance to lock in a lower rate
If you’re applying for a loan at a time when the market rates are low, a fixed interest rate may be a better option for the long term.
You don’t see any significant market signals that are beneficial to variable-rate loans
If the market does not signal that variable rates are about to go down any time soon, opting for a fixed interest rate may be better since you can benefit from the predictability.
FAQs About Fixed-Rate Personal Loans
When deciding if a personal loan is right for you, one of the most important decisions you will make is whether to opt for a fixed interest rate. It can sometimes prove worthwhile, but individual needs and circumstances vary. Learning the answers to other frequently asked questions about fixed-rate personal loans can help you determine the best course of action.
The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.
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