Fixed and Floating Interest Rates Compared

Many Americans deal with floating interest rates on a daily basis. With floating interest rates, your interest rate changes as you go, typically based on some sort of index. By comparison, a fixed interest rate does not fluctuate at all. It stays the same for the entire duration of the loan. Both of them can have their benefits depending on the application. Here are a few things to consider about each type of loan. 

Fixed Interest Rate

A fixed interest rate provides you with a much more consistent option. Each and every month, you know exactly what your payment will be. You never have to worry about what the interest rate will change to over the duration of the loan. The payment that you make on the first month of the loan will be the same as the payment you make on the last month. When you are living on a budget, a fixed monthly payment makes it much easier to plan for. When you have some consistency in your bills, you adapt and learn to live with them. 

With a fixed interest rate, you can feel safe knowing that no matter what happens to the interest rate in the market, you will be safe. You will not be watching the markets wondering what will happen next. Many people prefer this type of loan because it gives them confidence about the future. 

Floating Interest Rate

With a floating interest rate, the interest rate on your loan can change frequently. The interest rate is tied to an index that goes up and down with the market. Therefore, one year, your payment could be low and manageable. Then the next year, your payment is quite a bit more. 

With floating interest rates, there have been many cases of people's payments doubling over the life of the loan. Typically when you agree to a loan, you do so based on the assumption that you can afford the payment. The payment that you see at the beginning of the loan is the one that you plan on. Not many people plan on doubling that payment and still being able to afford it. 

The reason that most people get a fixed interest rate is because the initial payment is lower than a fixed rate loan. Many times, they will promotional interest rates for a certain period of time before the floating interest period starts. This makes it an enticing offer for the short term. Those that get floating interest rates either have short-term plans or fail to think of the future impact floating interest could have. 

The Verdict

If you are trying to choose between the two types of loans, most of the time you will be better off going with a fixed interest rate. If you plan on paying the loan off early and just want a low interest rate in the meantime, a floating interest rate may be to your advantage. However, in most cases, the safety that a fixed rate provides is preferred.

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