Author
Home > Business > What is the Difference Between Variable and Fixed Interest Rate?

Guilherme Mazui

•4 minutes to read

What is the Difference Between Variable and Fixed Interest Rate?

🆚 Go to Comparative Table 🆚

The main difference between variable and fixed interest rates lies in their fluctuation over time. Here are the key differences between the two:

Variable Interest Rate:

  • Fluctuates based on an underlying benchmark or index that periodically changes.
  • The interest rate on the loan can change, based on the prime rate or another rate called an “index”.
  • Typically has lower initial interest rates than fixed-rate loans.
  • Monthly payments and the amount of interest accrued on the loan will fluctuate throughout the loan's lifetime.
  • Suitable for borrowers who can afford to take the risk or who plan to pay off the loan quickly.

Fixed Interest Rate:

  • Remains the same for the entire life of the loan.
  • Provides predictable payments, as the monthly payment and interest will remain consistent until the loan is paid off.
  • Does not change throughout the loan term, making it easier for borrowers to budget for the future.
  • Commonly used for mortgages and auto loans.

In summary, variable interest rate loans have fluctuating interest rates that are based on market conditions, while fixed interest rate loans have constant interest rates throughout the loan's life. Borrowers should consider their financial situation, risk tolerance, and loan terms when deciding between variable and fixed interest rates.

On this page
  • What is the Difference Between Variable and Fixed Interest Rate?
  • Comparative Table: Variable vs Fixed Interest Rate

    • Comparative Table: Variable vs Fixed Interest Rate

    Here is a table comparing the differences between variable and fixed interest rates:

    Feature Variable Interest Rate Fixed Interest Rate
    Definition A variable interest rate loan is a loan where the interest charged on the outstanding balance fluctuates based on an underlying benchmark or index, such as the federal funds rate. A fixed interest rate loan is a loan where the interest rate charged on the outstanding balance remains constant throughout the loan term.
    Interest Rate Changes The interest rate and the corresponding monthly payments can change over time, typically based on the prime rate or other indexes. The interest rate and the corresponding monthly payments remain the same throughout the life of the loan.
    Risk Borrowers may prefer a variable interest rate if they believe interest rates will decrease in the future, resulting in lower loan repayments. However, there is a risk that interest rates could increase, leading to higher loan repayments. Borrowers may prefer a fixed interest rate if they want consistent, predictable monthly payments and to be protected from potential interest rate increases.
    Loan Types Variable interest rates are commonly found in mortgages, credit cards, personal loans, derivatives, and corporate bonds. Fixed interest rates are available for various types of loans, including mortgages, personal loans, and auto loans.

    Keep in mind that understanding the differences between variable and fixed interest rates is crucial for making informed decisions when applying for a new mortgage, refinancing your current mortgage, or applying for a personal loan or credit card.

    Read more:

    Guilherme Mazui

    Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.