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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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