Fixed rate loans are also called term loans where the interest rate stays the same for the loans for the entire term. The fixed rate loans are used to pay fixed assets that will be used for over 60 months or more — the combined interest of rate and principle is paid in an equal monthly payment that does not change over time. Fixed rate loans are generally safer than loans with variable rates as you do not know what to expect and one cannot have a plan for the same. Fixed rate loans start out with higher interest than other loans, and this can make a dramatic change in your monthly payments.
Fixed rate fails
Fixed rate loans do not change over time, and if you are getting a long term loan, a fixed rate loan might be the best option to go for.
Even if the rates fall and you have a fixed rate loan, you can always try to refinance to a lower rate loan. For this, you need to qualify for the new loan, and your credit score, debt to income ratios, etc. might have changed. You will have to pay closing costs, and that cost will reduce the benefits you get from refinancing.
Short term commitment:
Fixed rate loans can be less appealing when you borrow for a short amount of time as they come with higher rates than variable rate loans, evaluating how long you are going to keep the loan will help as if you are going to clear the loans within 5 years you might not want a fixed rate loan.
Loan prepayment charges:
In case you want to pay up the balance loan amount you may need to pay the prepayment penalty that can range anywhere between 2%-2.5% of the outstanding amount although it may differ from lender to lender.
Types of fixed rate loans
Interest only loans:
Interest-only loans come with fixed rates but are risky to use as you might get a rate that is competitive with an adjustable rate mortgage.
Auto loans and federal students loan:
Federal students loans are often fixed rate loan as it does not change and you can pay the down the balance over-time.
Personal loans also come with fixed rates, but credit cards are the exception due to which sometime the rate may change and not in your favour. Especially if you think you need a Christmas loan for bad credit score a fixed rate loan is not the right choice as it can be repaid in a short period of time and if you take up fixed-rate loans you will have to pay a lot compared to what you will have to pay for variable rate loans.