Fixed Rate vs. Adjustable Rate: Pros and Cons

If you are considering a loan and you are unsure as to the differences between fixed interest rates and adjustable interest rates, read on.

Fixed Rate
Installment loans typically have fixed rate interest, meaning that the interest rate and the monthly payments will remain the same for the entire length of the loan.

Advantages

• Installments are constant
• Payments are easy to budget
• Loan cost won’t increase
• No unpleasant surprises

Disadvantages

• If interest rate drops, yours remains high
• Initially more than adjustable rate

Adjustable Rate
With an adjustable rate, the interest on your loan will vary. When the interest rates change, your monthly payment changes as well. This generally happens once or twice yearly.

Advantages

• Annual increases are usually controlled
• Initial rate is lower than fixed rate
• If rates drop, your overall costs are lower

Disadvantages

• Not always an option
• Tough to budget for increase in rate
• Vulnerability to rate hikes