Fixed vs. Variable Interest Rates

When it comes to borrowing money, interest is an important factor to consider. Some loans offer fixed rates, where the interest rate remains the same throughout the life of the loan. Others have variable interest, where the rate may adjust up or down over time. So what are the pros and cons of each? Here’s how they work:

Fixed Rate

Typically associated with mortgages, auto loans, home equity loans and standard personal loans, fixed rates are locked in when you sign your loan agreement. This helps you know exactly how much you’ll be paying each month and allows for budget predictability no matter how the market may swing. Fixed rates are often higher than the starting interest rates for variable options, meaning you may pay a bit more in interest with a fixed rate if the market takes a downturn during the life of your loan.

Variable Rate

Variable rates are often available for credit cards, home equity lines of credit, private student loans and adjustable-rate mortgages (ARMs). Rates are often tied to underlying benchmarks like the Prime Rate as published in the Wall Street Journal. When this benchmark fluctuates, the interest rate and payment of your loan will follow. Though variable-rate loans can have unpredictable payments and may spike during periods of high inflation or rising interest rates, they offer advantages as well. With a variable rate, you can secure a lower initial rate than a fixed-rate loan, which may be ideal if you plan to pay off your debt quickly. And if you expect interest rates to fall during the life of your loan, a variable rate will allow for your interest to follow suit. Plus, variable-rate mortgages may include other attractive features, like City’s No Down Payment mortgage with no private mortgage insurance.

To determine which type of loan is right for you, talk to your local City banker. We can share the risks and benefits of each available option and help you figure out what best meets your needs.