Fixed And Variable Rates

Most loans that are not mortgage loans have a fixed rate. This means that the interest rate that was in effect when the borrower obtained the loan does not change unless the borrower refinances the loan in order to obtain a lower rate. It should come as no surprise that borrowers who refinance their fixed rate loans are doing themselves a disservice. While they may be getting a lower interest rates and lower monthly payments, they are actually adding to the overall length of the loan and paying more. If a borrower has a fixed rate loan, they are best to just leave it be and pay it off. Fixed rate loans are the most common type of mortgage loan.

Variable rate loans, seen mostly with mortgage loans, are loans where the interest rate fluctuates up and down over the life of the loan. While it may afford the borrower a lower interest rate over the life of the loan, they do not have the security of a fixed monthly payment. The bill could be higher or lower between months, making it very difficult to budget. Lenders do, however, have a floor (the lowest the rate can drop) and a ceiling (the highest the rate can rise) to keep borrowers from paying exorbitant amounts when the rate fluctuates. Many lenders also offer borrowers a discount if they refinance to a fixed rate loan.