A fixed interest rate loan is a loan where the interest rate doesn't fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict their future payments. Variable rate loans, by contrast, are anchored to the prevailing discount rate.
A fixed interest rate is based on the lender's assumptions about the average discount rate over the fixed rate period. For example, when the discount rate is historically low, fixed rates are normally higher than variable rates because interest rates are more likely to rise during the fixed rate period. Conversely, when interest rates are historically high, lenders normally offer a discount to borrowers to fix their interest rate over time, as rates are more likely to fall during the fixed rate period.
Some fixed interest loans - particularly mortgages intended for the use of people with previous adverse credit - have an 'extended overhang', that is to say that once the initial fixed rate period is over, the person taking out the loan is tied into it for a further extended period at a higher interest rate before they are able to redeem it.
Famous quotes containing the words fixed and/or interest:
“Museums, museums, museums, object-lessons rigged out to illustrate the unsound theories of archaeologists, crazy attempts to co-ordinate and get into a fixed order that which has no fixed order and will not be co-ordinated! It is sickening! Why must all experience be systematized?... A museum is not a first-hand contact: it is an illustrated lecture. And what one wants is the actual vital touch.”
—D.H. (David Herbert)
“The cohort that made up the population boom is now grown up; many are in fact middle- aged. They are one reason for the enormous current interest in such topics as child rearing and families. The articulate and highly educated children of the baby boom form a huge, literate market for books on various issues in parenting and child rearing, and, as time goes on, adult development, divorce, midlife crisis, old age, and of course, death.”
—Joseph Featherstone (20th century)