Interest rate plays a significant role when choosing any financial product. You might have already heard about the two types of interest rates – fixed and variable. Both interest rate types have their share of pros and cons you should know in detail, but this article aims to discuss fixed interest rates. Knowing how fixed interest rates work and their advantages and disadvantages can help you make an informed decision when looking for funding options.
Understanding a Fixed Interest Rate
A fixed interest rate, if applied to a mortgage, loan, or credit card, means that the interest charged will remain static throughout the specified period. If you do not follow the conditions and terms of the loan, your rate may change.
How Does a Fixed Interest Rate Work?
Let’s consider how a fixed interest rate works concerning a loan debt. For instance, if you take out a five-year loan of $40,000 at a fixed interest rate of 6%. Your monthly repayment amount would be $773.31. The monthly payment amount will remain the same throughout the five-year repayment term because the loan has a fixed interest rate of 6%. The interest rate paid for the loan will remain unchanged irrespective of changes in the finance market.
Types of Fixed-Rate Loans
There are many types of loans offering a fixed interest rate. These include:
1. Mortgages
A standard home loan, including both 30-year and 15-year mortgages, offers fixed interest rates.
2. Home equity loans
Lump-sum home equity loans usually have a fixed interest rate. Although home equity lines of credit (HELOCs) typically have a variable interest rate, it might be possible to convert your loan to a fixed interest rate.
3. Auto loans
The majority of auto loans have a fixed interest rate.
4. Personal loans
Personal loans offer both fixed and variable rates of interest. Some popular lenders provide personal installment loans with a fixed interest rate.
5. Student loans
Federal student loans, issued after June 30, 2006, offer fixed interest rates. Before mid-2006, private student loans might have either a fixed or variable interest rate.
Pros and Cons of Fixed Interest Rates
Now that you have learned what a fixed rate is and how it works, it’s time to consider its advantages and disadvantages.
Pros of a fixed interest rate
- A fixed-rate loan enables you to know your monthly loan repayment amount.
- A fixed interest rate makes it easy to draw a comparison among various financial products.
- Since the interest rate is predetermined, there is zero risk of payment shock down the road from increased interest rates.
Cons of a fixed interest rate
- Loans with a fixed interest rate might be more expensive than loan options offering a variable interest rate.
- If the interest rates fall, you will need to refinance or live with your higher rate.
- If you’re looking for short-term lending options, they may not compare well against adjustable-rate loans.
How to Calculate Fixed Interest Rate?
To calculate the interest payable on a particular loan with a fixed interest rate, you need to know the loan amount, the loan repayment period, and the interest rate. Here’s an example to understand how the fixed interest rate works.
Example of fixed interest rate
If you take out a typical loan of $35,000 for debt consolidation, the loan term is four years, and the interest rate on the loan amount is at 6%. Your monthly payable amount would be $821.98, and the total interest you would have to pay over the four years would be $4,454.85. Your monthly payment amount will remain $821.98, provided you do not increase your monthly payment amount to repay your loan quickly.
Fixed Vs. Variable Interest Rates
Financial products offering a fixed interest rate are popular among people with lower-risk appetites. A fixed interest rate will allow consistent monthly payments without any unexpected changes.
On the other hand, a variable interest rate, as the name suggests, is a type of interest rate that changes over time in response to market interest rates or prime interest rates. In the context of interest rates, a variable means that the interest rate either increases or decreases.
Financial products offering variable interest rates are ideal for people willing to take risks. The borrower may be rewarded with lower payments or have a higher payment on their loan. However, the fluctuating interest rate makes it difficult for individuals to plan their finances.
You should know that a borrower’s interest rate concerning either type of loan depends heavily on your credit scores, loan product, and the lender.
Conclusion
The interest rate offered on any financial product heavily impacts your financial decisions. Both fixed and variable interest rates have their share of advantages and disadvantages. Choosing a fixed or variable interest rate depends on your financial situation and risk appetite. Fixed interest rate financial products are mostly preferred because borrowers can accurately predict future costs and monthly payments.
Frequently Asked Questions
What Is a Payday Loan?
Payday loans are the most common type. These short-term loans are taken out against future pay. These loans are typically more expensive than personal loans due to their higher interest rates.
The borrower must repay all money within two week of receiving his next pay check. He may lose the entire amount borrowed if he does not repay it within two weeks.
These short-term loans are often offered by payday lenders, which can charge high fees. They are more likely to target people in financial distress. This makes them an easy way for borrowers to fall into debt.
Are PayDay loans legal?
They are illegal.
Because they exploit people who don’t already have financial aid, the courts have ruled them illegal.
Payday loan companies are often in trouble when they lend money without verifying income information.
When borrowers cannot afford the interest rates, these loans can be very difficult to repay.
In addition, many borrowers end up paying back far more than they borrowed. High fees and severe penalties can result if payments aren’t made in time.
In 2007, a federal law required payday lenders to verify income information prior to providing any type credit.
This law also places a limit on the maximum amount of money a person may borrow at one time.
What amount of a loan am I eligible for with no credit check?
If you do not have at least $1000 in liquid assets and are available to collateral, then you won’t be eligible for any loan. This is a must in order to avoid losing money on the deal.
But, if your investments or savings can be used as collateral, then you are okay.
Additionally, collateral can be used if you have a 401k from your employer.
Statistics
- Upgrade The company offers a 3 percent cash back on Auto, Health, and Home categories and a 1 percent cash back on the rest. (abcactionnews.com)
- The loans usually can be rolled over for additional finance charges, and many borrowers—as high as 80% of them—end up as repeat customers.89 (investopedia.com)
- Those protections include a cap of 36 percent on the Military Annual Percentage Rate (MAPR) and other limitations on what lenders can charge for payday and other consumer loans. (consumerfinance.gov)
- For example, CashUSA’s payday loan APRs range from 5.99% to 35.99%, placing them well within the averages for most major lines of credit, including credit cards and bank loans. (timesunion.com)
- A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. (consumerfinance.gov)
External Links
consumerfinance.gov
ncsl.org
How To
Why do we need installment loans?
Installment loans, which are short-term loans, require a minimum monthly payment. They typically last one year and allow for flexible repayment options. This is very convenient as it allows you to repay the loan whenever you wish and has the ability to have the money at your disposal.
The majority of people who apply to these loans are looking for cash quickly and don’t worry about their credit score. If you aren’t eligible for traditional bank financing, an installment loan can be a great option.
You should carefully consider how much you borrow before applying for an installment loan. You will need sufficient capital to pay the interest and fees plus another month of payments.
You’ll typically receive the funds within 24 hours when you get approved for an installment loan. The average processing fee for an application is around $40. You will be charged an extra fee by most lenders for this service. Compare offers until you find a good deal.
Installment loans are a great option if it’s difficult to pay your monthly bills on time. This type of loan is great for those who have bad credit and are in financial difficulty.
If your traditional bank has rejected you and you don’t have collateral, an instalment loan might be the best option. Your income, employment history as well your assets and debts are all factors that will be looked at by your lender. If you can prove that you can repay the loan, the lender will approve you for less than what you owe. Your total debt will not be paid off immediately. Instead, you’ll need to pay off a small portion each month.
An installment loan requires that you pay the entire balance before receiving a refund. Most lenders offer grace period during which you may delay your payments without being charged late fees.
