Interest rates on a loan are one of the many things applicants lookout for before deciding whether they want to take out that loan or not. Interest rates can make a difference between a good deal and a great deal. This is because interest rates impact how much you will be paying back each month. Just like we had mentioned in the previous article, there are two types of interest rates; Variable interest rates and Fixed interest rates. In this article, we will be discussing more on what exactly is a fixed interest rate.
What Is A Fixed Interest Rate?
A fixed interest rate is an interest rate that stays the same for the life of the loan or for a portion of it depending on the loan agreement. This means that you will have to pay an agreed amount of interest for a set amount of time such as one year. A fixed interest rate is popular among borrowers who want exact certainty on their repayment amounts. Some of the loans that come with a fixed interest rate include student loans, mortgages, auto loans, home equity loans and credit cards. Fixed interest loans also work well for businesses as they are not in the best position to deal with payments that change every month. Now because a fixed interest rate loan remains the same through the life of the loan, it is easier for the borrower to budget for the future.
With a fixed interest rate, interest is added to the amount you borrowed known as the principal amount. For a credit deal, fixed interest can help control the extra fees that accompany late payments but if late payment will be a regular occurrence for you, then you should avoid it. Note that there are restrictions that come with fixed interest rates. You generally won’t be able to make extra repayments or repay a loan early, but in the case you want to do so, you will have to pay a fee for it.
A borrower’s credit history is used by a lender to set the fixed rate therefore, if you have an excellent credit score you will get the best rate. Other factors a lender will consider when setting a fixed interest rate are the length of the loan, the borrower’s loan-to-value ratio (LTV) and the borrower’s income as well. Shorter loans usually have lower interest rates because a lender considers them less risky than long term ones. When calculating fixed interest rates, you need to know the loan amount, interest rates, and the loan repayment period. Online loan calculators can help you easily calculate fixed interest rates costs.
How to Compare Fixed Rate Loans
Considering some of these factors can help you select the best fixed rate loan option for your current situation.
- Get to know what interest rates you will be charged. Fixed interest rates vary from one lender to another determining what your repayments will be. You are also given an option of reducing your interest payments by providing an asset as security.
- Keep an eye out for the different fees and charges that are applicable such as early termination fees, monthly administration fees and establishment fees. Fees do vary from lender to lender therefore, go for the one who offers as minimal fees as possible in order to reduce your overall costs.
- Selecting the right lender when opting for a fixed rate car loan is very critical. Each lender has different features such as extended loan terms, minimum loan amount, insurance covers, flexible repayment schedules, lower interest and so on.
- Last but not least, when comparing, inquire whether you can repay the loan early or terminate it without having to pay a fee.
Note: Always read the fine print so as to avoid getting into something that you don’t understand. Ensure you are aware of all the fees, charges and terms and conditions before applying.
Pros and Cons of Fixed Interest Rates
By looking at the pros and cons of a fixed interest rate, deciding whether this kind of interest rate is suitable for you and your circumstances will be easy.
Pros of Fixed Interest Rates;
- It makes it easy for you to know how much to budget for each month as it ensures your cost will always be the same.
- It’s more attractive when interest rates are low
- With this rate, it’s easier to calculate long term costs of borrowing
Cons of Fixed Interest Rates;
- If interest rates decline, you may find yourself paying more for the loan. A fixed interest rate does not take into account fluctuations in the market.
- Fixed rates are typically higher than adjustable/variable rates
- Refinancing to a lower rate can be time consuming and expensive