Definition: What is a Fixed Rate?

A fixed rate is defined as a rate of interest that stays constant throughout the life of a loan or other liability. In some cases, the rate may only be fixed for a period of time within the life of the loan.

In the United States, a fixed rate is commonly available for the entire life of a mortgage and auto loan. 

In other countries, such as Canada, a fixed rate can only be locked in for short period of time, such as 5-7 years, after which the rate become variable. 

What are the advantages of securing a Fixed Rate?

What is a Fixed Rate

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Obtaining a fixed rate is desirable for creditors, especially during periods of low-interest, because it protects them from fluctuations in the market. 

A fixed rate loan allows debtors to know exactly what their monthly payments will be, and how much total interest they will pay during the life of the loan. 

By contrast, floating or variable interest rates subject debtors to fluctuations in the markets, and interest rates may be increased according to the term of the loan.

Does a Fixed Rate have any disadvantages?

Securing a loan at a fixed rate carries inherent risk, since interest rates may actually drop during the life of a loan. When this happens, the debtor is obliged to pay more than the current interest rates, since the interest rate on their loan was fixed at the time of closing. 

The most desirable time to lock in a fixed rate is therefore when interests are already low. 

Even if they drop below the fixed rate at certain times during the life of the loan, the overall result is often favorable for the debtor.

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