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Fixed vs Variable Rate
Every loan has a rate, and the rate is either fixed or variable. Fixed means the payment never changes. Variable means it can move up or down. The right choice depends on how long you will keep the loan and how much risk you can take.
Fixed rate: the same payment every month
With a fixed rate, the interest rate — and your monthly payment — stays the same for the whole loan. Take a $20,000 loan at a fixed 7.5% (an example rate) over 60 months: the payment is $400.76 every month, total interest is $4,045.54, and you know exactly what you will pay from the first month to the last. Fixed rates are the usual choice for car loans and personal loans in the USA, and for many home loans too.
Variable rate: the payment can move
With a variable rate, the rate follows a benchmark index plus a margin the lender sets, and it resets on a schedule — every month, every six months or every year. The same $20,000 loan over 60 months at a variable rate starting at 6.5% (an example rate) would start at $391.32 a month with $3,479.38 of total interest if the rate never moved. But if the rate rose to 8.5%, the payment on the same loan would be $410.33 a month with $4,619.84 of total interest. The starting rate is often lower than a fixed rate — that is the attraction, and the risk is that it can rise above it.
How variable rates are capped
Most variable-rate loans have caps: a limit on how much the rate can rise at one reset, and a lifetime cap on how high it can ever go. Read both caps before you sign. A loan that starts at 6.5% with a lifetime cap of 11.5% can cost far more than the starting payment suggests. The margin — the fixed amount added to the index — never changes, so two lenders with the same index can still offer very different variable rates.
Which one fits you?
Pick a fixed rate if you want a payment you can plan around, if you will keep the loan for years, or if rates look low and you want to lock one in. Pick a variable rate if you will pay the loan off quickly — before the rate has much time to move — or if you can afford a higher payment if rates rise. If a higher payment would break your budget, a variable rate is the wrong choice, however low it starts.
APR still matters for both
APR — annual percentage rate — is the interest rate plus most fees, spread over the year. Compare the APR as well as the rate when you shop for either type: a low rate with big fees can cost more than a slightly higher rate with small fees. And remember that the calculators on this site use the interest rate you enter, not the APR, because the monthly payment is figured from the rate. Run both options through the Loan Calculator with the rates you were quoted and compare the monthly payment and the total interest.
Sources and method. Standard loan amortization formula: monthly rate = annual rate / 12; monthly payment = P × r(1+r)n / ((1+r)n − 1). Simple interest I = P × r × t; compound interest A = P(1 + r/n)nt. Rates in the examples on this page are examples only, not live market rates. Results are estimates, not financial advice.
Estimate, not financial advice. This calculator uses the numbers you enter and the standard amortization formula. Your lender’s figures, fees and payoff rules can differ. Check the loan agreement and talk to a financial professional before you borrow.