What "fixed rate" means
When you take a fixed-rate loan, the lender sets your annual percentage rate before you sign. That rate applies to every month of the loan, whatever happens to interest rates in the wider economy.
Because the rate is fixed and the term is fixed, the payment is fixed too. You can write the same number in your budget for every month until the loan ends. Most personal loans work this way.
What happens inside each payment
The payment stays the same, but what it is made of changes. Early on, more of it goes to interest. As the balance falls, more goes to paying down what you borrowed.
In this example the first payment includes $52.06 of interest and the last includes $4.85. That is why paying extra early saves the most. The loan payoff calculator shows how much.
Fixed rate or variable rate
| Fixed rate | Variable rate | |
|---|---|---|
| The rate | Set when you sign, never changes | Tied to a benchmark rate and can go up or down |
| The payment | The same every month | Can change during the loan |
| Total cost | Known before you sign | Not known until the loan ends |
| Common on | Personal loans, auto loans | Credit cards, lines of credit |
| Suits you if | You want certainty | You can absorb a higher payment if rates rise |
Credit cards are the variable-rate product most people already hold. That is one reason moving card debt onto a fixed-rate loan appeals: the rate can no longer creep up. See how a debt consolidation loan works.
What to check on a fixed-rate offer
- The APR, not just the interest rate. APR includes required fees, so it is the fair number to compare.
- Any origination fee. It is usually taken out of the amount you receive.
- The term. A longer term lowers the payment but adds interest overall.
- Prepayment rules. Look for no penalty, so paying early saves you money.
Ours are set out line by line on the rates and fees page.