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Interest is the price paid by a money borrower for the use of a money lender's money. The original amount lent is knows as the principal, and the percentage of the principal which must be paid annually as interest is called the interest rate.
A loan featuring a Fixed Rate Interest means that interest rate stays the same throughout the life of the loan, or throughout a specified portion of the life of the loan.
For example, an interest rate may be fixed for 12 months at a certain rate, and then become a variable interest rate from then on for the life of the loan. Or, an interest rate may be fixed for 12 months at a certain rate, and then fixed at a different rate for the remainder of the loan.
With credit cards, even “fixed rate” cards are not necessarily fixed. The issuing bank can change the terms of the credit card agreement at anytime to specify a new fixed or variable rate provided they give you at least 30 days written notice. Also, many card holder agreements have clauses that allow the issuer to change the rate immediately in the event you miss a payment. In this case the 30 day notice is not required.
For money borrowers, there are several advantages for having Fixed Rate Interest. For example, a Fixed Rate Interest could be considered less risky than Variable Rate Interest because for the most part you don't have to worry about interest rate rises. In addition, the fixed rate allows you to budget for the future so that you can be sure that you can cover the interest repayments even if variable interest rates skyrocket. However, you still need to be careful, if the Fixed Rate Interest period ends, or the lender changes the Fixed Rate Interest in accordance with the credit agreement, then the rate of interest may go up, meaning that your interest repayments will also rise. But in general a Fixed Rate Interest can offer money borrowers a blanket of security and stability for a period of time.
For money borrowers, there can be several disadvantages for having Fixed Rate Interest. First, the price for increased security and stability for a money borrower, and potentially higher risk for the money lender, is reflected in a Fixed Rate Interest that is usually slightly higher than the average anticipated variable rate interest. In addition, when the Fixed Rate Interest period ends, borrowers can sometimes face steep interest rate rises, and this can have a severe impact on their financial budgets.
For money lenders, Fixed Rate Interest can expose them to higher risks than Variable Rate Interest. For example, they may be locked into credit agreements at a Fixed Rate Interest that is lower than the prevailing Variable Rate Interest because of recent interest rate hikes. In this case, the Fixed Rate Interest agreements will not be as profitable for the lenders as a variable rate loan. Alternatively, the money lender may have credit agreements with borrowers at a Fixed Rate Interest that is significantly higher than the current Variable Rate Interest because of recent interest rate falls.
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