What is a fixed rate loan?
What is a fixed-interest rate loan?
These loans are set at a fixed interest rate for a specified period (usually one to five years). The advantage of this type of loan is that it allows you to organise your finances and repayments without the risk of rising interest rates. Whilst you are protecting yourself against an increase in the cost of your loan, choosing this type of loan also creates the disadvantage of not benefiting from a drop in rates.
Most types of business, equipment, car and personal finance are shorter term loans, eg, less than 5 years, and only offered at a fixed interest rate.
When we talk about fixed vs variable rate loans, we are referring to property mortgages. At the end of the term of the fixed interest rate loan period, all fixed rate loans automatically revert to the applicable variable rate. At this stage you have the option to lock in another fixed rate for a new term, switch to variable or go for a loan where you split with a percentage fixed and the remainder variable.
Fixed rate loans typically have limited features and lack the flexibility of 100% variable rate loans. There may be early exit fees and limited ability to make extra payments.