A Comparison of Fixed and Variable Interest Rates

One of the factors that determine the total amount of balance that you have to pay your lender is the interest rate. The interest rate, which is the percentage that the lender charges you for the loan, is always added to your monthly balance. This percentage, however, may differ according to the specific interest rate imposed on your loan. Here are the two kinds of interest rates — the fixed interest rate and the variable interest rate.

Fixed interest rate

A fixed interest rate remains unchanged for the duration of your debt. So, whether the economy performs well or not, the amount of money added to your balance will always be the same. The benefit of having a loan with a fixed interest rate is that you know exactly how much money the lender expects from you every month. So, if you gave the lender $250 for your January repayment, then the amount of money that you need to repay the next month is still $250.

The downside to having a loan with a fixed interest rate is similar to its advantage: the interest added to your balance remains the same for the duration of your loan. This becomes a disadvantage when the economic index performs well because variable interest rates will decrease by then. So, while other debtors are enjoying lowered interest rate in their loans, you are still stuck with the same interest rate.

Variable interest rate

Unlike the fixed interest rate, a variable interest rate is subject to change: it either rises or drops. When the economic index performs well, the variable interest rate will drop, causing a substantial decrease in your total balance. Because a variable interest rate is tied to the economic index, the amount of money that will be added to your total balance will always depend on how the economy is doing. Therefore, the interest rate in your loan will increase when the economic index and the economy both perform poorly.