A fixed-rate loan refers to funding that has a consistent interest rate throughout its terms. That means when a borrower is repaying a fixed-rate loan, each monthly payment should be the same. In 2023, the average interest rate for a 30-year fixed-rate mortgage was 6.81%.1
However, it’s important to keep in mind that some factors may affect the predictability of fixed-rate loans. For example, if you missed payments and accumulated late fees, this may result in a higher monthly payment compared to previous months.
Fixed-rate loan options can come in many forms, including installment loans, debt consolidation loans, and more. Other types of loans, like variable-rate loans, have rates that fluctuate depending on current market conditions. This means that loan terms like interest rate and, therefore, monthly installments are subject to change from month to month.
Types of Fixed Rate Loans
| Type of Fixed-Rate Loan | Definition | Typical Term Length | Common Uses |
| Fixed Rate Mortgage | Fixed-rate mortgages are typically the largest loans most people will take out, with long terms to keep payments manageable. Fixed-rate mortgages also help homeowners avoid the risk of interest rate increases. | 15, 20, 30 years | Purchasing a home or property. |
| Auto Loans | Shorter terms compared to mortgages, reflecting the lower purchase price of vehicles and their depreciation rate. Fixed rates ensure consistent payments throughout the loan term. | 2 to 7 years | Purchasing a vehicle. |
| Personal Loans | Versatile loans that can be used for a variety of purposes. Fixed rates provide payment stability for the borrower. | 1 to 7 years | Covering unexpected expenses. |
| Student Loans | Can have very long terms, especially for professional degrees. Fixed rates offer predictability for repayment, which is especially important for recent graduates. | 10 to 30 years | Financing education. |
| Business Loans | Term lengths vary widely depending on the purpose of the loan. Fixed rates can help businesses plan their finances without worrying about variable interest costs. | 1 to 20 years | Business-related expenses. |
| Home Equity Loans | These loans are secured against the borrower’s home equity. Fixed rates protect borrowers from rising interest rates and ensure consistent repayment amounts. | 5 to 30 years. | Home improvements, debt consolidation, or major purchases. |
Pros and Cons of Fixed-Rate Loans
Before applying for any kind of loan, including a fixed-rate loan, it’s important to consider the potential pros and cons first.
PRO: Consistent Monthly Payments Offer Predictability and Stability
When loans have fixed interest rates, that means borrowers can repay their debt in equal monthly installments. Since each payment should be roughly the same, consumers can easily incorporate loan payments into their existing budget. They can even plan ahead and submit larger payments some months to pay off their loan even faster and save money on interest rate charges!
CON: May Have Higher Payments Compared to Variable-Rate Loans
With variable-rate loans, such as an adjustable-rate mortgage, interest rates are subject to change depending on current market conditions. That means these types of loans may have lower monthly payments when interest rates are lower. But it goes both ways, meaning if interest rates rise you’ll also have a higher amount due some months.
For example, say you had a fixed-rate mortgage loan. While this means each monthly mortgage payment will be the same, it may also mean paying a bit extra some months compared to mortgage payments on a loan with a variable interest rate.
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