Fixed interest rate

Definition

A fixed interest rate is an interest rate on a loan that remains constant throughout the term of the loan. It does not fluctuate with market conditions, providing predictable payments for borrowers.

5 Must Know Facts For Your Next Test

1. Fixed interest rates provide stability and predictability in monthly loan payments.
2. They are often higher than initial variable rates because they offer long-term security against market fluctuations.
3. Fixed interest rates are beneficial in a rising interest rate environment as they protect borrowers from increasing costs.
4. Loans with fixed interest rates include mortgages, car loans, and student loans.
5. The total cost of borrowing with a fixed interest rate can be calculated using simple or compound interest formulas.

Review Questions

• What is one advantage of having a fixed interest rate on a loan?
• How does a fixed interest rate differ from a variable interest rate?
• Name three types of loans that typically use fixed interest rates.

Related terms

Variable Interest Rate: An interest rate that can change over the term of the loan based on market conditions.

APR (Annual Percentage Rate): The yearly cost of borrowing expressed as a percentage, which includes both the nominal interest rate and any additional fees or costs.

Amortization:

The process of paying off debt over time through regular payments, where each payment covers both principal and interest.