What Are Fixed and Variable Rates?
Personal loans can come with either a fixed or variable interest rate, and the type you choose affects your monthly payment and total cost over the life of the loan. A fixed-rate personal loan has an interest rate that stays the same for the entire loan term, so your monthly principal and interest payment remains unchanged. This predictability makes fixed-rate loans a popular choice for budgeting.
A variable-rate personal loan has an interest rate that can adjust over time based on changes in an underlying benchmark index, such as the prime rate. When the index goes up or down, your loan's interest rate—and therefore your monthly payment—can change during the loan term, depending on your specific loan agreement.
Most personal loans in the U.S. are offered with fixed rates. Variable-rate personal loans are less common and are more likely to be structured as personal lines of credit rather than traditional term loans.
Sources: FDIC, First Alliance Credit Union, MoneyLion, Bankrate, Upgrade, Citi, Numerica Credit Union
How Monthly Payments Differ
The most visible difference between fixed and variable rate loans is in how monthly payments behave. With a fixed-rate loan, your monthly payment for principal and interest stays the same from the first payment to the last. This makes it easier to plan your budget, as you know exactly what you'll owe each month.
With a variable-rate loan, your monthly payment can change if the underlying index moves. The adjustment frequency can vary by lender—some may adjust monthly, others quarterly or annually. If market interest rates rise, your payment could increase, potentially straining your budget; if they fall, your payment could decrease.
- Fixed-rate loan: payment unchanged for the entire term, simplifying budgeting.
- Variable-rate loan: payment may change when the index changes; the risk of higher payments exists if rates rise.
Sources: First Alliance Credit Union, MoneyLion, Upgrade, Investopedia, Citi, Numerica Credit Union, Horizon Bank
Interest Rate Risk Over the Loan Term
Interest rate risk is the possibility that your loan's rate changes, affecting your cost. A fixed rate eliminates that risk for the life of the loan—your rate never changes regardless of market conditions. This is beneficial when rates are expected to rise, because you lock in a known rate.
A variable rate carries the risk that your rate and payment will increase if market rates go up. However, it also means you could benefit if rates fall, as your rate and payment may decrease. Variable-rate loans often start with a lower initial rate compared to fixed-rate loans, but that rate is not guaranteed to stay low.
Some variable-rate loans include caps that limit how much the rate can increase over a certain period or over the life of the loan. Such caps can provide a measure of protection, but the specifics vary by lender and loan terms.
Sources: First Alliance Credit Union, MoneyLion, Upgrade, Investopedia, Citi, Numerica Credit Union, Horizon Bank
Comparison of Total Interest Costs
Whether a fixed or variable rate results in lower total interest depends on the path of market rates during your loan term and the specific rates offered to you. Because variable rates typically start lower, you may pay less interest in the early months, but if rates rise, later payments could include more interest, potentially making the variable-rate loan more expensive overall.
Fixed-rate loans, on the other hand, do not benefit from falling market rates unless you refinance. If you take out a fixed-rate loan and market rates drop significantly, you would continue paying the higher locked rate unless you refinance to a new loan.
No single rate type is universally cheaper. The best choice depends on your individual circumstances, the loan amount and term, and your expectations for future interest rate movements.
Sources: Upgrade, Investopedia
Lender Options for Each Rate Type
Fixed-rate personal loans are widely available from banks, credit unions, and online lenders. Because most personal loans in the U.S. are fixed-rate, you will likely have many options to compare. Variable-rate personal loans are less common and may be offered as personal lines of credit rather than installment loans.
If you are considering a variable-rate loan, it is essential to understand the specific terms: how often the rate can adjust, what index it is tied to, whether any caps limit rate increases, and how much your payment could change. These terms vary by lender, so careful review of the loan agreement is crucial.
Sources: First Alliance Credit Union, MoneyLion, Bankrate, Numerica Credit Union
Choosing Based on Your Financial Stability
Your financial stability and risk tolerance should guide your decision. If you prefer predictable monthly payments and want to avoid any chance of your payment rising, a fixed-rate loan is likely a better fit. It simplifies budgeting and gives you certainty about your payment for the entire loan term.
If you are comfortable with some payment variability and believe interest rates may stay stable or fall, a variable-rate loan could offer initial savings. However, you must be prepared for the possibility that your payment will increase if rates rise. A variable-rate loan is generally more suitable if you have enough financial flexibility to absorb higher payments without jeopardizing your budget.
- Choose a fixed rate if you value payment predictability and want to avoid rate risk.
- Consider a variable rate only if you can handle potential payment increases and have a view on future rate movements.
Sources: First Alliance Credit Union, Upgrade, Investopedia, Numerica Credit Union
Example Scenarios for Different Rate Environments
The following examples show how different rate paths might affect monthly payments and total interest, using simplified calculations that do not include origination fees or other charges.
In the first scenario, market rates stay flat for the entire loan term. In this scenario, the variable-rate loan would be cheaper.
These examples are illustrative only and do not represent current market rates or personalized advice. The exact figures depend on the specific rates offered, the loan amount, and the timing and size of rate changes, all of which vary by lender and economic conditions.
Sources: First Alliance Credit Union, Upgrade, Investopedia, Horizon Bank
Side-by-Side Comparison
The table below summarizes the key differences between fixed and variable rate personal loans. Use it to evaluate your own priorities, such as payment predictability, starting rate, and how you would be affected by market rate changes.
| Attribute | Fixed-rate personal loan | Variable-rate personal loan |
|---|---|---|
| Payment predictability | High: monthly payment unchanged for the loan term | Low: monthly payment may change if the rate adjusts |
| Typical starting rate compared to the other type | Usually higher | Usually lower |
| Rate change frequency | Never changes for the loan term | May change when the underlying index changes (e.g., monthly, quarterly, or annually) |
| Effect of falling market rates | No benefit unless you refinance | Monthly payment may decrease |
| Effect of rising market rates | No impact, payment stays the same | Monthly payment may increase, potentially straining budget |
Sources: FDIC, First Alliance Credit Union, Upgrade, Citi, Numerica Credit Union
Frequently asked questions
Are variable-rate personal loans ever a good idea?
Variable-rate loans can be a good idea if you are comfortable with payment variability and you expect interest rates to remain stable or fall. They typically start with a lower rate than fixed-rate loans, which can save you money early on. However, you must be able to handle the possibility of higher payments if rates rise. Assess your budget and risk tolerance before choosing this option.
Sources: First Alliance Credit Union, Upgrade, Investopedia, Numerica Credit UnionWhat factors influence whether a fixed or variable rate is cheaper?
The relative cost depends on the starting rates offered, the length of the loan term, and how market interest rates move during that term. If rates stay flat or fall, a variable-rate loan with its lower starting rate is likely to be cheaper. If rates rise, a fixed-rate loan could be cheaper because your rate is locked. Your loan term also matters: the longer the term, the more time for rates to change, increasing the risk for a variable rate.
Sources: First Alliance Credit Union, Upgrade, Investopedia, Horizon BankHow often can variable rates change?
The adjustment frequency is set by your lender and loan agreement. It could be monthly, quarterly, or annually, depending on the product. For example, some lines of credit adjust monthly, while others may adjust less often. Review your loan documents to see the specific schedule for your loan.
Sources: MoneyLion, Numerica Credit UnionSources
- Q: What is the difference between fixed-rate and variable-rate? — FDIC
- Fixed vs. Variable: Choosing the Right Personal Loan Rates — First Alliance Credit Union
- Are Personal Loans Fixed or Variable Rate? Quick Guide — MoneyLion
- 8 types of personal loans and their uses — plus 5 to avoid — Bankrate
- Fixed vs. Variable Interest Rates: What's the Difference? — Upgrade
- Fixed or Variable Rate Loans: Find the Best Interest Deal — Investopedia
- Fixed Rate vs. Variable Rate Loans — Citi
- Variable-rate vs. fixed-rate loans — Numerica Credit Union
- Pros & Cons: Fixed Vs Variable Interest Rate — Horizon Bank
- Fixed vs. Variable Interest Rates: Definitions, Benefits & ... — Investopedia