Financing > How Fixed Interest Rates Work

How Fixed Interest Rates Work

by: John Mussi

Interest rates are an important part of any loan or credit line. The interest rate that you have on your loan, credit card, or other credit line can seriously affect the total amount that you pay toward repayment; after all, that's how lenders make their money.

All interest rates are not the same, however? some rates will fluctuate over time as local and national interest rates change, whereas others are set at a certain level and remain at that level until the loan or credit line is repaid in full.

Below you'll find information on the latter type, which are known as fixed interest rates.

Defining Fixed Interest Rates

A fixed interest rate is one that remains at a specific rate regardless of the increases and decreases of interest rates locally and nationally. This means that if an interest rate is fixed at 10%, it will remain at 10% until the loan or credit line has been paid off whether other rates increase to 20% or drop down to 5%.

These rates are sometimes offered for an introductory period to add security to a new loan or credit card, after which the interest rate reverts to a variable rate meaning that it fluctuates with the increases and decreases of other rates.

Advantages of Fixed Interest Rates

Obviously, the main advantage of a fixed interest rate is that you can guarantee your interest rate against future increases. This is especially useful in situations where you find a particularly good interest rate and manage to lock it in as a fixed rate. No matter what increases come while you're making your payments, you still maintain your good interest rate.

Another advantage of a fixed interest rate is the fact that fixed rates that are used in a promotional manner (as in the case of introductory rates and the like) are usually significantly lower than other rates that are available.

Even though introductory fixed rates expire after a time (usually 6 months or 1 year), you still save money on your payments during this time and can take advantage of this to try to get ahead on your payments so that you have fewer payments to make at a higher rate.

Disadvantages of Fixed Interest Rates

Of course, fixed interest rates aren't without their disadvantages. The major disadvantage of fixed rates is the fact that when interest rates drop below the rate that you are paying, you still have to pay the higher rate.

This can be particularly troublesome in the case of mortgages or automotive financing, since interest rates can drop and remain low for relatively long periods of time? meaning that you're having to pay the higher rate until the variable rates rise again.

Another disadvantage is that when promotional rates end there is usually a much higher variable rate that has to be paid, resulting in a sudden increase in your monthly payment that you might not be expecting? after all, you've been paying the lower rate for a while, and you might have gotten used to the payments.

Common Places to Find Fixed Interest Rates

Fixed interest rates can appear in a variety of places, ranging from automotive financing and mortgage loans to debt consolidation and homeowner loans. They are often used as an introductory rate for automotive financing and credit cards, though some mortgage lenders use them in a promotional manner as well.

The availability of fixed interest rates depends upon the individual lender, so be sure to look into whether they are offered or not before expecting to receive one.

You may freely reprint this article provided the following author's biography (including the live URL link) remains intact:

About The Author

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the www.directonlineloans.co.uk website.

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