Fixed vs variable interest rate
A fixed interest rate stays the same for the life of the loan, while a variable rate moves up or down with a benchmark such as the prime rate.
With a fixed rate, the percentage is locked at signing and your payment stays predictable from the first month to the last. With a variable rate, the cost is tied to a benchmark like the prime rate, usually quoted as that benchmark plus a margin. When the benchmark moves, your rate and payment move with it. If you take prime plus 3 percent and prime rises from 7.5 to 8.5 percent, your rate climbs from 10.5 to 11.5 percent, and your interest cost rises accordingly.
The choice comes down to predictability versus potential savings. A fixed rate protects you if rates climb, which makes budgeting easier, but you may pay a bit more upfront for that certainty. A variable rate can start lower and fall further if benchmarks drop, though it can also rise and squeeze your cash flow. Lines of credit often carry variable rates, while many term loans are fixed. If steady payments matter more than chasing the lowest possible cost, fixed tends to fit better; if you can absorb swings, variable may save money.
Common questions
Which is better for a business loan, fixed or variable?
It depends on your risk tolerance. Fixed gives steady, predictable payments. Variable can be cheaper if benchmark rates stay low or fall, but it exposes you to higher payments if they rise.
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