What Is a Fixed Interest Rate?

A fixed interest rate is an interest rate that stays the same for the term of a loan or line of credit. Unlike variable interest rates, which can change based on market conditions, fixed interest rates don't change. Fixed interest rates are common for mortgages, student loans, auto loans and personal loans.

Here's what you need to know about fixed interest rates.

How do fixed interest rates work?

Fixed rates stay the same, even if market conditions change. This is different from a variable rate, which can change with the market. With a fixed-rate loan, borrowers have a predictable monthly payment and a total debt cost. There are some conditions under which a lender may be able to change a fixed interest rate, such as if you miss payments.

The fixed interest rate you're offered depends on several different factors. Lenders typically set fixed and variable interest rates based on market conditions. Banks set a "prime rate" that determines the range of rates offered for different financial products. The prime rate is usually based on the Federal Reserve's federal funds rate, but may be based on other benchmarks. The interest rate you qualify for can also depend on financial factors like your credit score and debt-to-income ratio (DTI).

Fixed vs. variable interest rates

Variable interest rates can fluctuate based on market changes, while fixed rates stay constant.

Although variable-rate loans don't offer the consistent payments fixed-rate loans do, they can save borrowers money if rates go down. That said, there's also the risk of paying more if rates go up.

Generally, a fixed-rate loan may make sense if you want a consistent payment that fits easily into your budget, or if market rates are trending higher. A variable interest rate can make more sense if you expect rates to fall.

Pros and cons of fixed interest rates

Opting for a fixed interest rate can come with both benefits and drawbacks.

Pros:

• Predictable payments: Fixed-rate loans come with fixed payment amounts.
• Protection from market fluctuations: Borrowers don't have to worry about their payment increasing if market rates go up.
• Easier budgeting: A consistent payment means borrowers can easily budget.

Cons:

• Higher initial rates: Variable-rate loans may start at lower interest rates than fixed-rate loans.
• Potential to miss out on falling rates: If interest rates drop after taking out a fixed-rate loan, you won't be able to benefit from the lower rates.
• Possible refinancing costs: If you decide to refinance for better terms, like a lower interest rate after rates fall, that may come with additional costs.

Common types of fixed-rate loans

Here are some places where you're likely to see fixed-rate loans:

• Mortgages: While some mortgages (adjustable-rate mortgages, or ARMs) can have a variable rate, most have a fixed rate.
• Auto loans: Most auto loans have a fixed interest rate.
• Personal loans: Many lenders offer fixed interest personal loans, which can be used for a variety of purposes, such as debt consolidation, expenses and home improvements.
• Student loans: Most federal student loans have fixed interest rates. Private student loans can have a fixed or variable rate.

When should you choose a fixed interest rate?

Sometimes, fixed-rate loans are your only option. For example, many personal loan lenders may only offer fixed interest rates. However, if you have the choice, it's important to consider factors like:

• Expected rate changes: Interest rates generally follow market changes. If rates are expected to rise, locking in the current rate may be the best option.
• How much you value a stable monthly payment: Fixed-rate loan payments are easier to budget around, while variable-rate loan payments can be unpredictable.
• The loan term: Longer-term loans, such as mortgages, with a variable interest rate mean there are more opportunities for rates to change.
• Your risk tolerance: Because variable interest rates can change, there's a risk you'll end up paying more. You may also end up paying less if rates drop. While some borrowers may be willing to take on that risk in exchange for potential savings, that isn't true for everyone.

Citi offers personal loans to both existing Citi customers and new Citi customers that meet specific eligibility criteria, including an established credit and income history along with additional factors determined by Citi. If you think you could benefit from a Citi Personal Loan, apply online today.

This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.