Fixed-rate Loan

Financial Dictionary -> Loans -> Fixed-rate Loan

A Fixed Rate Loan can be applied to any kind of loan, whether it be a personal loan, mortgage, long-term loan, car loan, secured or unsecured loan and so on. It simply refers to the interest rate (or percentage of the amount borrowed) paid on top of the original debt.

When you take out a loan you will usually be assigned an interest rate in line with current base rates and the economy in general. This is known as an adjustable rate loan because the interest rate can fluctuate. A fixed rate loan is when an interest rate is agreed on in the terms of the loan and it stays that way throughout the loan period, without fluctuating.

A fixed rate loan can be particularly cost effective if taken out when general interest rates are low. This means that even when interest rates rise and everyone else is paying higher rates, you'll still be paying that low fixed rate loan as agreed. However the reverse can happen and if interest rates are really high and you get locked in to a fixed rate loan, you could be paying this even when interest rates in general are much lower.

Despite this, in extreme cases it is usually agreed that the interest rate can be changed in case the lender or borrower finds themselves at a severe disadvantage. It is rare for a fixed rate loan to be taken out when interest rates are high so the above situation isn't a common occurrence.

One of the great benefits of a fixed rate loan is that because it doesn't fluctuate you can calculate exactly how much you need to pay back and don't need to take in to account any fluctuations. Payment is usually paid in monthly installments with the interest on top.