A fixed rate stays the same for the term of a loan, so payments are predictable. A variable rate moves with a benchmark, so payments can fall or rise. Fixed offers certainty; variable can be cheaper but carries more risk.
How fixed rates work
Your interest rate is locked when you borrow. If market rates rise, your payment doesn’t change.
The trade-off: fixed rates often start a bit higher, and you may not benefit if rates fall.
How variable rates work
The rate is tied to a benchmark plus a margin. When the benchmark changes, so does your rate.
Some loans have caps that limit how much the rate can rise in a period or over the loan’s life.
Choosing between them
Fixed suits people who value predictability or have tight budgets.
Variable may suit those who can absorb higher payments, expect to repay quickly, or expect rates to fall.
Before choosing a variable rate, calculate your payment if the rate rose by 2–3 points. If that would strain your budget, fixed may be safer.
Frequently asked questions
Can I switch from variable to fixed?
Often through refinancing, though fees and conditions apply.
Are credit cards fixed or variable?
Many credit cards have variable rates tied to a benchmark.
This guide explains a general concept; it isn’t a recommendation to buy, sell or borrow. For decisions about your own money, consider speaking with a licensed financial professional.
