What Is a Fixed-Rate Loan?

Fixed interest rates provide certainty over the life of your loan

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A fixed-rate loan has an interest rate that doesn't change throughout the life of the loan. Because the rate remains the same for the entire term, the monthly loan payment shouldn't change, resulting in a relatively low-risk loan.

As you compare loan options, note whether or not loans feature fixed rates. Learn how these loans work so that you can choose the right loan for your needs.

What Is a Fixed Interest Rate?

A fixed interest rate is a rate that will not change for the entire term of a loan. For example, a 30-year fixed-rate mortgage keeps the same interest rate for the whole 30-year period. Your monthly loan payment calculation is based on the interest rate, so locking in the rate results in the same principal and interest payment every month.

Broadly speaking, loans come in two forms: fixed and variable. Variable-rate loans have an interest rate that can change over time (although the rate may be fixed for several years at the beginning of your loan). If rates increase, your monthly payment on a variable-rate loan may also rise—sometimes substantially.

Although your loan payment should not change with a fixed-rate loan, your monthly obligation could change over time. For example, if you include property taxes and insurance premiums in your mortgage payment, those amounts can vary from year to year.

How Does a Fixed-Rate Loan Work?

With a fixed-rate loan, your lender sets the interest rate when issuing your loan. That rate depends on things like your credit history, your finances, and the details of your loan. When the rate is fixed, it remains the same throughout the life of your loan, regardless of how interest rates in the broader economy move.

Your required monthly payment depends, in part, on your interest rate. A higher rate results in a higher monthly payment, all other things being equal. For example, on a four-year loan for $20,000, your monthly payment is $507.25 with a 10% interest rate. But with a 15% rate, the payment jumps to $556.61 per month.

Fixed-rate loan payments reduce your loan balance and stabilize your interest costs with a flat payment that lasts a specific number of years. With a 30-year mortgage or a four-year auto loan, a fixed-rate loan would bring your loan balance to zero at the end of the loan’s term.

Pros and Cons of Fixed-Rate Loans

Fixed-rate loans are generally safer than variable-rate loans, but you pay a price for the stability these loans provide. Ultimately, you need to decide what you’re comfortable with and what you think interest rates might do in the future.

Pros
  • Predictable monthly payment through the life of your loan

  • Know exactly how much interest you’ll pay

  • No risk of “payment shock” down the road from increased interest rates

Cons
  • Usually a higher starting rate than variable-rate loans

  • If rates fall, you must refinance or live with your higher rate

  • May not compare well for short-term needs

If you’re having trouble choosing, you might benefit from a hybrid of fixed- and variable-rate loans. For example, a five-year, adjustable-rate mortgage (ARM) has a relatively low fixed rate for the first five years, but the rate can change in subsequent years. If you don’t plan to keep your loan for many years, it could make sense to get a rate that’s fixed for a limited time. Just be prepared for life changes—you might keep the loan for longer than you expect.

Types of Fixed-Rate Loans

Many loans offer a fixed interest rate. These include:

  • Home purchase loans: Standard home loans, including traditional 30-year and 15-year mortgages, are fixed-rate loans.
  • Home equity loans: A lump-sum home equity loan usually has a fixed interest rate. Home equity lines of credit (HELOCs) often have variable rates, but it may be possible to convert your loan balance to a fixed rate.
  • Auto loans: Most auto loans have a fixed interest rate.
  • Student loans: Federal student loans issued after June 30, 2006, have fixed rates. Private student loans may have fixed or variable interest rates.
  • Personal loans: Personal installment loans may have fixed or variable rates. That said, some of the most popular personal loan lenders offer loans with fixed interest rates.

Key Takeaways

  • Fixed-rate loans use an interest rate that does not change over time.
  • Because the rate is fixed, your monthly payment should not change.
  • A fixed rate can eliminate the risk of payment shock due to rising rates.
  • Fixed-rate loans typically have an interest rate that’s slightly higher than a variable-rate loan’s initial rate.
  • If interest rates fall, fixed-rate loans may be less attractive than variable-rate loans.

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