A Fixed Interest rate and a Variable Interest rate are two types of interest rates commonly used in loans and Financial instruments . The main difference between them lies in How they are structured and whether they can change over time.
Here’s a breakdown of each:-
# Fixed Interest Rate:- A Fixed Interest rate remains unchanged throughout the entire duration of the loan or Financial agreement. When you borrow Money or Invest in a product with a Fixed Interest rate, the Interest rate is set at a specific percentage at the beginning , and it remains constant for the agreed-upon period. Regardless of any fluctuations in the market or changes in the prevailing Interest rates , your Interest rate will stay the same, ensuring a predictable payment amount throughout the loan term.
# Variable Interest Rate (also known as Adjustable or Floating Interest Rate):- A Variable Interest rate, as the name suggests , can fluctuate or “Vary” over time. The Interest rate is typically tied to a reference rate, such as a benchmark rate set by the Central Bank or an index like the London Interbank Offered Rate (LIBOR). The reference rate serves as a baseline , and the Variable Interest rate is determined by adding a certain margin or spread on top of it . Changes in the reference rate will result in corresponding adjustments to the Variable Interest rate.
Variable Interest rates are subject to Market Conditions and Economic factors , So they can go up or down during the loan term. If the reference rate increases, your Interest rate will also rise , leading to higher payments. Conversely, if the reference rate decreases , your interest rate and payments will decrease as well. The Variability of the Interest rate introduces uncertainty into the future payments , as they may change periodically.
To summarize , A Fixed Interest rate remains constant over time , providing stability and predictability in payments, while a Variable Interest rate can change periodically , offering the potential for lower or higher rates based on Market conditions. The choice between the two depends on your Risk tolerance, Market expectations , and your preference for either stable payments (Fixed rate) or potential cost savings (Variable rate) .