What is the Difference Between a Fixed Interest Rate and a Variable Interest Rate? Which One is Better?
Every loan agreement comes standard with a form of interest that must be paid. Interest rates can be negotiable but usually appear in one of two forms: variable or fixed. A variable interest rate loan has an interest rate on the outstanding balance that rises or falls based on the current status of the market interest rate. On the other hand, a fixed interest rate loan has a constant interest rate for the duration of the agreed loan term.
Which one is better depends on the borrower's preference. Variable Interest rates may rise at any time. However, they may also fall. Fixed interest rates will not change either way, which excludes borrowers from paying less interest when the market interest rates decline. A fixed interest rate can be beneficial or detrimental all depending on the state of the market at the time the loan agreement is finalized.