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Personal Loans 101: Understanding Fixed Term and Fixed Interest Rate Loans

Shopping for a personal loan can be complicated. There are certain phrases being thrown around that you may not be familiar with, like fixed term loans and fixed interest rate loans.

These two personal loan terms are essential to understand in order to acquire the loan you need, with the payment schedule you want and set up in a way that benefits you.

Take a look below to learn more!

Fixed Term Loan

A fixed term personal loan is a very straight forward, easy to understand loan.

When you take out a personal loan, the interest is added to the amount of the loan and then that total number is divided into monthly payments. All monthly repayments are the exact same amount.

You will also know precisely how long you will be paying for the loan. That is it!

Every month, you make the same payment until you have paid the full amount of the loan plus the interest.

As long as you pay the loan on time each month, nothing changes or waivers. The loan is “fixed”.

Fixed Interest Rate Loan

Fixed interest rate loans do not fluctuate during the period of the loan. The interest rate is set when you take out the loan and it will not change.

There are also variable rate loans where the interest rate can fluctuate based on the market.

With a variable interest rate loan, you monthly payment may be higher one month, then lower the next making for a far riskier interest rate.

You never know what you are going to pay and you may end up paying much more if interest rates rise!

Benefits of Fixed Rate and Fixed Term Loans

With a fixed rate loan or a fixed term loan, you are locked into a specific rate and monthly payment.

This is fantastic for planning purposes as you always know what you will be paying and can calculate exactly when you will have your loan paid in full.

This is also good if you feel interest rates are at an all-time low. If you can lock in a low interest rate, your personal loans will cost you less over time.

Variable interest rates can go up… or down

Downsides of Fixed Rate and Fixed Term Loans

If you opt for a fixed rate loan and then interest rates plummet in the next few months, you will be stuck with your original rate.

This can be a negative as you will be able to clearly see how a slower rate would have saved you money.

However, even with a fixed rate loan, you can always opt to refinance at the lower rate if needed!

Fixed term loans and fixed interest rate loans are great personal loans to have.

Predictability is a good quality in a loan and it makes it easier for you, the borrower, to pay it off.

Definitely consider this type of loan when you look for your personal loan!

About Ronnie E.

Ronnie is the frugal Latina of the group. Hailing from the beautiful Andes Mountains in Bolivia, she lives and breathes frugality. She loves to figure out how to spend less money and takes on the challenge of finding great deals and cheaper options every day.

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