Fixed interest
Encyclopedia
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.
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
where the interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
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
Discount rate
The discount rate can mean*an interest rate a central bank charges depository institutions that borrow reserves from it, for example for the use of the Federal Reserve's discount window....
.
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.