Fixed vs. Variable: Choosing the Right Personal Loan Rates

If you’re shopping around for a personal loan, you may hear about fixed rate and variable rate loans. Both terms refer to the loan interest rate, and either can be a smart choice, depending on your situation.

Here’s a closer look at the differences between fixed rate and variable rate personal loans and how to determine which option is right for you.

What Is a Good Interest Rate on a Personal Loan?

APRs for a personal loan range between 8% and 36%, though the rate you’re offered will depend heavily on the loan amount, repayment term, and your credit profile. Generally speaking, the higher your credit score, the lower your rate will be. To find the lowest rate and best terms, shop around and compare rates among different lenders.

Fixed vs. Variable Loan Rates

Deciding whether to go with a personal loan with a fixed or variable rate generally boils down to two factors: the predictability of your payments and potentially lower costs.

Fixed Interest Rate

Fixed-rate is a general term that can apply to different types of loans with a variety of uses, including student loans, mortgages, auto loans, and unsecured personal loans.

Fixed rate loans have an interest rate that does not change over the life of a loan, which means you pay the same amount each month. It also means you know with certainty the total interest that you’ll pay over the life of the loan.

However, there are potential drawbacks to consider. Fixed rates may be higher than variable rates at the start of your loan term, and these loans aren’t as flexible. You may be charged an application or origination fee, and you could get hit with fees or penalties if you pay off the loan early. Plus, if interest rates drop, you won’t be able to benefit because your rate is locked in.

Variable Interest Rate

Variable rate loans have an interest rate that will fluctuate over time in line with prevailing interest rates.

Variable rates are usually pegged to changes to a well-known index, such as the 1-month LIBOR. LIBOR (the London Interbank Offered Rate) is the interest rate that banks charge one another to borrow money; the 1-month means that the variable rate can change monthly. A rate change one month also changes the monthly payment due for that month, as well as the total expected interest owed over the life of the loan.

However, some variable rate loans come with a cap that sets a limit on the interest rate that you can be charged, regardless of how much the index interest rate changes.

On the plus side, you could potentially pay less interest over time than you would with a fixed-rate loan. And your lender may allow you to switch to a fixed-rate loan at any time during the loan term.

But if interest rates rise, you could end up paying more than you would have with a fixed-rate loan.

Which Type of Loan Rate Should I Choose?

If you like the consistency of knowing exactly what your monthly payments will be over time, you might prefer a fixed rate loan. Also, if you plan to pay your loan back over a longer period of time, say 10 or 20 years, you might prefer to eliminate the risk of interest rate changes over time by selecting a fixed rate loan.

In contrast, you might prefer a variable rate if you want to take advantage of the maximum possible savings but have the financial flexibility to make higher monthly payments and total interest should interest rates rise. You might also prefer variable rate loans because you plan to pay off your loan in a short time frame, such as 10 years or less.

What’s the best option for you? There’s no universal right or wrong answer. The decisions on loan amount, term, and fixed or variable rate all depend upon your personal situation and flexibility.

The Takeaway

With fixed-rate loans, you’re locked into an interest rate for the life of your loan, which means payments are predictable. Interest rates on variable-rate loans depend on prevailing market interest rates, so the total interest owed will depend upon changes in the broader environment.

Ultimately the decisions on the loan term, amount, and loan type depend on your personal situation.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.