Key insights:
- Fixed interest rates are interest rates that remain the same for the life of a loan or line of credit, resulting in predictable interest costs and payments
- A fixed interest rate can help protect you against rising rates in the future, but it means you wouldn't capture the savings of falling rates
- Mortgages, auto loans and personal loans commonly come with a fixed interest rate
A fixed interest rate is an interest rate that stays the same for the term of a loan or line of credit. For example, you may come across these interest rates when applying for a mortgage, federal student loan, auto loan or personal loan.
Let's explore more about fixed interest rates, how they work, pros and cons, and when to choose a fixed interest rate loan.
How do fixed interest rates work?
Fixed interest rates stay the same, even if market conditions change. This is different from a variable interest rate, which can change with the market. With a fixed-rate loan, borrowers have a predictable monthly payment and a total debt cost. Keep in mind, however, that there may be some conditions under which a lender may be able to change a fixed interest rate, such as missing payments.
What determines your fixed interest rate?
The fixed interest rate you’re offered depends on several different factors. Lenders typically set fixed and variable interest rates based on market conditions. Banks set a “prime rate” that determines the range of rates offered for different financial products. The prime rate usually follows the Federal Reserve's federal funds rate. The interest rate you qualify for can also depend on financial factors like:
- Credit score
- Income and employment history
- Debt-to-income ratio (DTI)
Fixed vs. variable interest rates
Unlike fixed interest rates, variable interest rates can fluctuate over time based on market changes.
Although variable-rate loans don’t offer the consistent payments fixed-rate loans do, they can save borrowers money if rates go down. That said, there’s also the risk of paying more if rates go up.
Generally, a fixed-rate loan may make sense if you want a consistent payment that fits easily into your budget, or if market rates are trending higher. A variable interest rate can make more sense if you expect rates to fall.
Pros and cons of fixed interest rates
Opting for a fixed interest rate can come with both benefits and drawbacks.
Pros:
- Predictable payments: Fixed-rate loans come with fixed payment amounts.
- Protection from market fluctuations: Borrowers don’t have to worry about their payment increasing if market rates go up.
- Easier budgeting: A consistent payment can help borrowers to easily budget.
Cons:
- Higher initial rates: Variable-rate loans may start at lower interest rates than fixed-rate loans.
- Potential to miss out on falling rates: If interest rates drop after taking out a fixed-rate loan, you won’t be able to benefit from that change.
- Possible refinancing costs: If you decide to refinance for a lower interest rate after rates fall, that may come with additional costs.
Common types of fixed interest rate loans
Here are some types of fixed-rate loans you may come across:
- Mortgages: While some mortgages (called adjustable-rate mortgages, or ARMs) can have a variable rate, most have a fixed rate.
- Auto loans: Most auto loans have a fixed interest rate.
- Personal loans: Many lenders offer fixed-interest personal loans, which can be used for a variety of purposes, such as debt consolidation, expenses and home improvements. Citi offers flexible, fixed-rate personal loans to qualified applicants. If you think you could benefit from a Citi Personal Loan, apply online today.
- Student loans: Most federal student loans have fixed interest rates. Private student loans can have a fixed or variable interest rate.
When should you choose a fixed interest rate?
Sometimes, fixed-rate loans are your only option. For example, many personal loan lenders may only offer fixed interest rates. However, if you can choose between a variable and fixed interest rate, it’s important to consider factors like:
- Expected rate changes: Interest rates generally follow market changes. If rates are expected to rise, for example, locking in the current rate may make sense.
- How much you value a stable monthly payment: Fixed-rate loan payments may be easier to budget around, while variable-rate loan payments can be less predictable.
- The loan term: Longer-term loans, such as mortgages, with a variable interest rate mean there are more opportunities for your rate to change.
- Your risk tolerance: While variable interest rates may lead to interest savings, there’s also a risk you’ll end up paying more. While some borrowers may be willing to take on that risk in exchange for potential savings, that isn’t true for everyone.
Fixed interest rate loans can make sense, but they may not be right for every situation. Using pre-qualification can help you weigh your options and understand potential terms from multiple lenders. That way, you'll be able to find the best option for your needs without impacting your credit.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
