A fixed interest rate is an interest rate that stays the same for the entire life of the loan, so the rate and the payment do not change over time. As one federal example, the Truth in Lending Act defines a "fixed-rate mortgage" as "a transaction secured by real property or a dwelling that is not an adjustable-rate mortgage or a step-rate mortgage."
A fixed interest rate is set when a loan is originated and remains constant for the full term, so the scheduled payment stays the same from the first installment to the last. This contrasts with a variable or adjustable rate, which can rise or fall as an underlying index changes, causing the payment to change as well. Fixed rates are common on installment loans, many personal loans, and fixed-rate mortgages, where a predictable payment supports budgeting. Because the rate is locked, the total interest over the life of the loan can be projected in advance from the rate, the principal, and the term.
With a fixed rate, the rate is set in the loan agreement at signing and does not follow market indexes afterward. On an installment loan that usually means a level payment: the same amount is due on each scheduled date, and the lender can produce the full schedule on the first day.
A variable rate, by contrast, is tied to an index and can move after the loan starts, which changes the payment or the length of the loan. Disclosures for variable-rate credit must explain how the rate can change; a fixed-rate loan has no such adjustment terms, which is what makes its total cost predictable when payments are made on schedule.
A fixed rate does not fix every cost. Charges that sit outside the rate, such as a fee for a late or returned payment, can still be added under the agreement, so a fixed-rate loan can cost more than its schedule shows if payments slip. The fixed part is the rate and the scheduled payment; what the borrower controls is paying on time and, where allowed, paying early.
An example
Two borrowers take out loans on the same day. One loan has a fixed rate, so the payment printed on the schedule never changes. The other has a variable rate tied to an index; a few statements later the index rises and that borrower's payment goes up. The fixed-rate borrower's total interest can be calculated from the start, while the variable-rate borrower's cannot.
Common misconceptions
Myth: A fixed rate means a fixed total cost no matter what.
In fact: With a fixed rate, the scheduled cost is known in advance, but paying early can lower the total interest, and late charges can add to it.
Myth: Fixed-rate loans always cost less than variable-rate loans.
In fact: A fixed rate brings predictability. Whether it costs more or less than a variable rate depends on the rates offered and how rates move over the life of the loan.
Myth: A fixed payment and a fixed rate are the same thing.
In fact: They usually go together on installment loans, but a payment can also be held level while a variable rate changes the length of the loan instead.
What to check
- Whether the agreement describes the rate as fixed or variable.
- Whether the scheduled payment stays the same for the whole term.
- Any event, such as a missed payment, that the agreement says could change the terms.
- The total of payments shown in the disclosure.
How this applies at Desert Rock Capital
Desert Rock Capital loans have fixed biweekly payments: each payment is the same amount on a set schedule, agreed before you sign, with no balloon payment at the end. The amount, every payment and the total cost are disclosed in writing first, and there is no prepayment penalty if you pay the loan off early.
Based on our loan requirements, loan amounts and application pages. Your actual terms are in the loan agreement.