If you want to build a house or start up your own business, then you may need to take a loan to get things started. When people decide to take loans for whatever reason, they often choose the loan option that works best for them.
There are two types of loan: the fixed-rate loan and the variable rate loan.
We have noticed that many borrowers prefer fixed-rate loans, especially for long-term loans. Fixed-rate loans are better for long-term loans since you cannot predict the future and monthly payments with accuracy.
Before we go on, let us see what a fixed-rate loan is.
What is a fixed-rate loan?
A fixed-rate loan is a type of loan that requires you to make an instalment payment with an interest rate that cannot be changed during the period of re-payment. In fixed-rate loans, the payment amount remains the same even though the amount that goes towards the interest payoff and that of the principal will be different.
A fixed-rate payment loan is predictable, so it eliminates the chances of surprises at the time of repayment.
In summary, a fixed-rate payment loan has an interest rate that will not change for the entire term of the loan. For example, a 20-year fixed-rate mortgage will keep the same interest rate for the entire 20-year period.
This means that your monthly loan calculation is based on the set rate.
How a fixed-rate payment loan works
Now, we are going to look at how a fixed-rate payment loan works in few steps.
Step 1: The lender sets the interest rate for the loan
In a fixed-rate payment loan, your lender sets the payment rate of the loan when giving you the loan. The interest rate that your lender sets depends on factors like your credit history and the details of your loan. Once the rate is fixed, it remains the same for the entire term of the loan.
Step 2: the set interest rate affects your monthly repayment
Your interest rate affects your monthly repayment. This means that a higher rate will result in a higher monthly payment, and a lower rate will result in a lower monthly payment.
Step 3: Flat rate payment that lasts for the entire term of the loan
With a fixed-rate payment, your loan balance is reduced and your interest cost is stabilized for the entire period of the loan.
Advantages and Disadvantages of fixed-rate loans
Many people prefer fixed-rate loans to variable-rate loans because of the stability they get to enjoy opting for it, but this stability often comes with a price.
Before you make your decision, let us look at some advantages and disadvantages of fixed-rate loans.
Advantages of fixed-rate loans
- Fixed and predictable monthly payment throughout the term of the loan.
- Knowing the exact interest you will pay.
- No risk of getting an increased interest rate during the term of the loan.
Disadvantages of fixed-rate loans
- The starting rate is usually higher than variable-rate loans.
- You don’t get to pay a lower rate if the rate falls.
- The starting rate may not favour your short-term loan payment plan.
How to calculate your fixed-rate monthly payment
If you have decided to take a fixed-rate loan, you can simply calculate your monthly payment with the calculator. Your monthly payment will depend on:
- the amount (the amount of money you borrowed),
- the term (the life span of the loan)
- the interest rate of the loan.
Use this information to fill in the required inputs in the boxes, then view the result above.