Fixed Interest Rate
A fixed rate loan is exactly as it sounds – the interest rate is fixed, or stays the same, for the entire life of your loan.
Pros: You’ll know what your interest rate is and won’t have to worry about fluctuations down the road.
Cons: The tradeoff for knowing what your rate will be for the long haul is that it is often a higher rate to start than a variable rate option.
Variable Interest Rate
When you select a variable rate loan, your interest rate will fluctuate over time based on the current index rate. Your lender adds a percentage to that base according to your credit score and history, and there is usually a limit or “ceiling rate” on how high your rate can go if the index increases.
Pros: Variable rate options are typically lower than fixed rate at the start of your loan. Additionally, if the index decreases in the future, so will your interest rate.
Cons: There is risk involved; while your rate could go down, it could also increase, meaning you will pay more in interest over time.