Fixed vs. variable interest rates: What’s the difference?

When you apply for a loan or credit card, it comes with an interest rate—among many other things. Knowing how interest rates work can help you better understand the cost of borrowing money and how you’ll manage payments.

One place to start? Figuring out the differences between fixed and variable interest rates. This guide can help you get started.

Key takeaways

  • A variable interest rate can fluctuate based on changes to index rates, like the prime rate.
  • Credit cards and home equity lines of credit are two examples of loans with variable interest rates. 
  • A fixed interest rate typically doesn’t change throughout the loan term.
  • Mortgages and auto loans are two common examples of fixed-rate loans.

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And if you want to learn some annual percentage rate (APR) basics before comparing fixed and variable interest rates, check out this short video:

What is a variable interest rate?

A variable interest rate can change over time. It typically fluctuates based on an index—like the prime rate—that lenders use to set their own rates. Variable interest rates are common with credit cards, private student loans, home equity lines of credit (HELOCs) and personal loans.

When it comes to credit card interest rates, they’re usually expressed as a yearly rate—known as an APR

How do variable interest rates work?

As the index rates change, the interest rate on a variable-rate loan may change accordingly. That means the rate may increase or decrease.

Some variable-rate loans may also have a cap. Caps limit how much the interest rate can change—even if the index rises higher than the cap.

When it comes to the term of a loan with a variable interest rate, consider this from the Consumer Financial Protection Bureau: “The longer the term of the loan, the more risky a variable rate loan can be for a borrower because there is more time for rates to increase.”

How often do variable rates change?

Variable interest rates may change periodically based on index rates. Consider a variable-rate credit card that’s tied to the prime rate. If the prime rate rises or falls, your rate may increase or decrease with it.

Some credit cards or loans may have guidelines about how often your rate can change and by how much. For example, your loan terms may only allow a rate change once or twice a year.

What is a fixed interest rate?

As its name implies, a fixed interest rate generally doesn’t change over time. Fixed rates are based on market conditions at the time you take out the loan—and they usually stay the same for the life of the loan. This can make it easy to know how much your payment is each month. And that consistency may make it easier for you to set a budget and stick with it. 

Common types of fixed-rate loans include auto loans and home loans.

Can a fixed interest rate change?

Keep in mind that “fixed” doesn’t mean the rate won’t ever change. Your loan or credit card agreement should be able to explain more. 

It might be rare to find a fixed-rate credit card these days. But the Office of the Comptroller of the Currency provides a few guidelines. It says, “The bank generally cannot change your rate during the first year after the account was opened.” After that, it must provide written notice 45 days before any change is made.

It also notes a few exceptions related to introductory rates and late payments.

Fixed vs. variable interest rate FAQ

Here are a couple of frequently asked questions when comparing fixed and variable interest rates:

Your card agreement is usually a good place to start.

With credit cards, your cardholder agreement will state how a card’s APR can change over time. Remember, if you get a credit card with a promotional APR, the APR may change when the promotional period ends.

With a mortgage, you can look for that information in the documents you signed at closing. You may be able to do the same with a car loan.

You may also be able to get information about changes to variable APRs by calling your lender or visiting its website.

Fixed vs. variable interest rates in a nutshell

When it comes to fixed and variable interest rates, remember that fixed rates won’t change in most circumstances. But variable rates may increase or decrease depending on the index rate.

If you’re comparing credit cards, APR is one way to compare your options—along with things like rewards, benefits and fees. You can learn more about the difference between APR and interest rates and see what might be considered a good rate for a credit card.

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