When you borrow money, the interest rate determines how much the loan costs. Rates come in two basic types: fixed and variable. Knowing the difference helps you predict your payments and avoid surprises.
What is a fixed rate?
A fixed interest rate stays the same for the entire life of the loan. On an installment loan with a fixed rate, your monthly payment never changes. You know on day one what each payment will be and what the loan will cost in total if you pay as scheduled.
What is a variable rate?
A variable rate can go up or down over time. It is usually tied to a benchmark, such as the prime rate, plus a margin. When the benchmark rises, your rate, and often your payment, rises with it. Most credit cards and home equity lines of credit have variable rates.
Pros and cons
- Fixed rate pros: predictable payments, easier budgeting and protection if market rates rise.
- Fixed rate cons: you will not benefit if market rates fall.
- Variable rate pros: may start lower than a comparable fixed rate.
- Variable rate cons: payments can rise, sometimes significantly, which makes planning harder.
Which is right for you?
If your budget is tight or your income is steady but not flexible, a fixed rate is usually the safer choice, because a payment increase could cause real strain. A variable rate may make sense only if you could comfortably handle higher payments.
Compare offers using APR
Whatever the rate type, compare offers using the APR, which reflects both interest and certain fees, and ask whether there is a penalty for paying early. Private Access Loans offers fixed payments and no prepayment penalty. To see how fixed payments work in practice, read What Is an Installment Loan and How Does It Work?
