How Fixed Interest Rates Work
Interest rates are an important part of any loan or credit line.
The interest rate that you have on your loan, credit card, or
other credit line can seriously affect the total amount that you
pay toward repayment; after all, that's how lenders make their
money.
All interest rates are not the same, however... some rates will
fluctuate over time as local and national interest rates change,
whereas others are set at a certain level and remain at that
level until the loan or credit line is repaid in full.
Below you'll find information on the latter type, which are
known as fixed interest rates.
Defining Fixed Interest Rates
A fixed interest rate is one that remains at a specific rate
regardless of the increases and decreases of interest rates
locally and nationally. This means that if an interest rate is
fixed at 10%, it will remain at 10% until the loan or credit
line has been paid off whether other rates increase to 20% or
drop down to 5%.
These rates are sometimes offered for an introductory period to
add security to a new loan or credit card, after which the
interest rate reverts to a variable rate meaning that it
fluctuates with the increases and decreases of other rates.
Advantages of Fixed Interest Rates
Obviously, the main advantage of a fixed interest rate is that
you can guarantee your interest rate against future increases.
This is especially useful in situations where you find a
particularly good interest rate and manage to lock it in as a
fixed rate. No matter what increases come while you're making
your payments, you still maintain your good interest rate.
Another advantage of a fixed interest rate is the fact that
fixed rates that are used in a promotional manner (as in the
case of introductory rates and the like) are usually
significantly lower than other rates that are available.
Even though introductory fixed rates expire after a time
(usually 6 months or 1 year), you still save money on your
payments during this time and can take advantage of this to try
to get ahead on your payments so that you have fewer payments to
make at a higher rate.
Disadvantages of Fixed Interest Rates
Of course, fixed interest rates aren't without their
disadvantages. The major disadvantage of fixed rates is the fact
that when interest rates drop below the rate that you are
paying, you still have to pay the higher rate.
This can be particularly troublesome in the case of mortgages or
automotive financing, since interest rates can drop and remain
low for relatively long periods of time... meaning that you're
having to pay the higher rate until the variable rates rise
again.
Another disadvantage is that when promotional rates end there is
usually a much higher variable rate that has to be paid,
resulting in a sudden increase in your monthly payment that you
might not be expecting... after all, you've been paying the
lower rate for a while, and you might have gotten used to the
payments.
Common Places to Find Fixed Interest Rates
Fixed interest rates can appear in a variety of places, ranging
from automotive financing and mortgage loans to debt
consolidation and homeowner loans. They are often used as an
introductory rate for automotive financing and credit cards,
though some mortgage lenders use them in a promotional manner as
well.
The availability of fixed interest rates depends upon the
individual lender, so be sure to look into whether they are
offered or not before expecting to receive one.
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