Should You Choose a Fixed or Variable-Rate Loan?

Updated July 21, 2021 - First published on May 7, 2019

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When you borrow money, you may have a choice between a fixed-rate loan or a variable-rate loan. Read on to find out how to choose which one is right for you.Image source: Getty Images.

When you borrow money, you may have a choice between a fixed-rate loan or a variable-rate loan. Read on to find out how to choose which one is right for you.

When you borrow money, the interest rate you pay is one of the most important considerations. Interest is the cost of borrowing, and the higher the rate, the more expensive your loan will be.

As you shop around to compare interest rates, you’ll likely notice you have two choices: You could opt for a fixed-rate loan, or you could opt for a variable-rate loan. You’ll likely face this choice with personal loans, mortgage and home equity loans, and even some car loans.

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Deciding between a fixed or a variable-rate loan can be tricky, as there are pros and cons to consider for both options. To help you make the choice, here are a few key factors that you need to think about.

Understanding fixed vs. variable-rate loans

When deciding between a fixed versus a variable-rate loan, it’s imperative to understand how each of these loans works and what the difference between them is.

If you opt for a fixed-rate loan, the interest rate stays the same for the entire life of the loan. You’ll know exactly how much interest you’ll pay each month, and in total, before you receive the loan funds and before you begin paying the loan back. Since the interest rate never changes, your monthly payments also never change.

With a variable-rate loan, on the other hand, your interest rate is not fixed for the life of the loan. It may be fixed for a set period of time. For example, if you took out a variable rate or adjustable rate mortgage, the loan rate might be fixed for the first two years, or five years, or even longer. After that period of time when the fixed rate expires, your loan’s interest rate can adjust.

The specific amount of time your initial interest rate is locked in will vary depending upon the kind of loan. In some cases, your rate is only fixed for a very short time. The frequency at which your rate can adjust is also determined by the lender and type of loan. Your rate may be restricted to adjusting just once per year, or it may adjust monthly or bi-annually.

With a variable-rate loan, the rate is usually linked to a financial index. Your loan may be linked to the Prime Rate or to the LIBOR index. It’s usually equal to that index plus a certain percentage, such as Prime Rate plus 3%. If the financial index your loan is linked to goes up, the interest rate could go up. If it goes down, the interest rate could go down.

Because your interest rate is able to change with a variable-rate loan, your monthly payments could change too. This means you could end up paying a higher -- or lower -- monthly payment than you started with.

Pros and cons of fixed-rate loans

Opting for a fixed-rate loan is generally a better choice if you want to minimize risk. You’ll know going in exactly how much you’ll be paying each month and you won’t take a chance on your payments rising and becoming unaffordable over time.

Unfortunately, this certainty can come at a cost. Fixed-rate loans generally have higher rates than the initial starting interest rate on a variable- or adjustable-rate loan. This means you’ll be paying more up front for the loan that you take on than you would if you opted for a variable-rate loan.

Pros and cons of variable-rate loans

Variable-rate loans have the opposite pros and cons compared with fixed-rate loans.

With a variable-rate loan, you generally start with a lower rate -- which is a big pro. That’s especially true if you’re going to struggle initially to make loan payments but you expect your income will rise.

The downside is that you take a big risk. There’s always the chance that the rate could go down, which is another pro. However, there’s also a chance the rate could go up. This could make borrowing much more expensive in the long run, and it could even put you at risk of defaulting on your loan depending upon just how high the rate goes.

Is a fixed or variable-rate loan right for you?

Ultimately only you can decide whether a fixed or a variable-rate loan is the right type of loan for your situation.

If you’re planning on paying off the loan over a very long time -- such as when you take out a mortgage and plan to stay in the home for 30 years -- it makes sense to take out a fixed-rate loan. After all, chances are good that interest rates will rise over a long period of time, so you’re taking a big chance that you’ll end up with a more expensive loan.

If you cannot afford for your payments to go up at all, then a fixed-rate loan is also the better option. You don’t want to gamble on not being able to make your payments when rates inevitably go up. It’s worth paying a little extra up front to avoid this precarious situation as defaulting on a loan could destroy your credit and affect your long-term financial stability in serious ways.

On the other hand, if you’re only going to have the loan for a short time, a variable loan may make sense -- especially if you plan to pay off or refinance the loan before the rate could adjust. However, even this is risky because there’s not always a guarantee you’ll be able to pay off or refinance as expected. If you took a mortgage with a variable rate, for example, property values could fall and could leave you unable to sell your home to repay the loan, even if you were planning on doing so.

If you’re considering a variable-rate loan, make sure you understand exactly when and how payments will adjust -- and what the maximum monthly payment will be. If the maximum monthly payment is too high for you to afford to pay, you should strongly consider passing on the variable-rate loan due to the high risk of something going wrong that leaves you in default.

Make a smart choice on variable vs. fixed-rate loans

It’s important when comparing loans that you consider whether the rate is variable or fixed so you can compare apples to apples. You should also think seriously about the pros and cons of each option, rather than just assuming the lower variable-rate loan is always the best deal. By weighing your options carefully and considering your overall financial situation, you can make the right choice about which loan type is best for you.

Our picks for the best personal loans

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.

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Christy Bieber

Christy Bieber is a full-time personal finance and legal writer with 15 experience. She has a JD from UCLA and is a former college instructor.

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If You Have a Wells Fargo Savings Account, You Should Switch ASAP. Here's Why

By: Steven Porrello | Updated Nov. 7, 2023 - First published on Nov. 7, 2023

These days, storing your savings in a Wells Fargo account pretty much serves one purpose: Quick access to cash at brick-and-mortar banks or ATMs. But if you have savings you're not spending anytime soon, a Wells Fargo Way2Save Savings account ranks high in the worst places to keep your savings. No offense if Wells Fargo is your favorite bank, but it's time to stop leaving money on the table. Here's why. Wells Fargo can't compare to today's top high-yield savings accounts As of writing this, the Wells Fargo Way2Save Savings account has a 0.15% APY, which is not only lower than the national average (0.60%) but also several times lower than today's top-paying savings accounts. At 0.15%, you'll earn about $15 annually for every $10,000 you save. Not exactly the most exciting reward for saving money. By comparison, many of today's top-paying savings accounts have rates above 5%. Case in point: the Western Alliance Bank High-Yield Savings Account via Raisin. This account has a mouth-watering APY of 5.26%, no fees, and a low opening deposit of $1. At that APY, you'll earn $526 for every $10,000 you save. That's 35 times more than the $15 you would have earned in your Wells Fargo Way2Save Savings account. Of course, the major benefit of the Wells Fargo Way2Save Savings account is that you can access your savings at Wells Fargo branches or via ATMs. That's important if you withdraw cash frequently, as online banks will make you transfer the money electronically to an account with ATM access. But even if accessing cash is important to you, there are still better options than the Wells Fargo Way2Save Savings. For example, the SoFi Checking and Savings account gives you a cash back debit card and access to over 55,000-plus fee-free ATMs. Plus, it has a decent APY of up to 4.60%. That's not the highest APY I've seen, but it's not bad for an account that combines checking and savings into one. What about the Wells Fargo Platinum Savings account?Now, the Wells Fargo Platinum Savings account does have a compelling offer right now. New savings customers can lock into a promotional APY of 4.62% when they sign up for a new Wells Fargo Platinum Savings account before Jan. 9, 2024, and maintain a daily minimum balance of $10,000. The emphasis there is on "new." According to the fine print, this offer is for new savings customers who don't currently have a Wells Fargo savings account -- whether that's Wells Fargo Platinum Savings or the Wells Fargo Way2Save Savings. So if you're already a Wells Fargo client, the bank will likely assign you the account's regular APY, which ranges from 0.25% to 2.51%, depending on balance.Again, if you're saving money at Wells Fargo, there's no question about it -- you're missing out on higher interest rates. You may have good reasons for using Wells Fargo, such as having greater access to your savings. But if you're fine with online banking, then trust me -- you deserve better than a rock-bottom APY. Take a look at today's top-paying savings accounts and see how much more you could be earning for your savings.

Have a Chase Savings Account? You're Probably Missing Out on $400-Plus per Year

By: Steven Porrello | Updated Nov. 24, 2023 - First published on Nov. 24, 2023

Chase is the largest bank in the U.S., and one of the largest in the world. It has over 4,700 brick-and-mortar locations, more than 15,000 ATMs, and around a couple trillion in bank deposits. But for all this banking power, there's one thing Chase doesn't have: a savings account that can compete in today's high-rate environment. Seems as if a big bank like Chase would have at least one savings account that earned high interest, right? Truth is, banks lose money when they pay high interest rates and will forgo offering them if they don't need to attract customers. As the largest bank in the U.S., Chase is doing just fine and doesn't need high rates to bring in more deposits. But that leaves Chase clients in a bit of a conundrum. Just how much money are you missing out by keeping it in a savings account at Chase? Well, when you start to crunch the numbers, it can be a lot. The average American is probably missing out on $400 per year Today's most competitive rates on savings accounts are sitting at a two-decade high of about 5.25%. Most of these savings accounts are through the company Raisin, which is essentially a marketplace for finding high-yield savings and CDs. Last I checked, the highest rate on Raisin was 5.30% on a Customers Bank High-Yield Savings Account, followed by both VyStar Credit Union and DR Bank at 5.29%. How much could you make on 5.30%? According to a recent survey of U.S. Family Finances by the Federal Reserve, the median savings in 2022 was about $8,000. If you saved $8,000 in the Customers Bank High-Yield Savings Account powered by Raisin, you would earn about $424 within a year. In contrast, a Chase Savings Account pays out at a rock-bottom APY of 0.01%. At that rate, it's almost pointless to do the math but if you like your copper Abes, you'd make about $0.80 on $8,000 in 12 months.When is a Chase savings account worth it? I'm not going to lie -- I have a Chase account. I don't keep a lot of money in it, but I do keep some. The reason is that I live four blocks from the Chase bank in downtown Portland and like the security of having some money within reach. When I need to withdraw cash (rare but it happens), I can just go in person and use the ATM. And when I need to deposit cash -- birthday money, thanks Mom -- I can do it without jumping through hoops. If you want banking convenience like this, a high-yield savings account through Raisin or any other online bank will likely frustrate you. Raisin is a case in point: When you deposit money in a Raisin-powered account, you transfer it from an external account (which could be a savings account at Chase) into a service bank (Lewis & Clark Bank), which is then transferred into a custodial account at the bank account of your choice (a Customers Bank High-Yield Savings Account or a Western Alliance Bank High-Yield Savings Account, for example). If you want to withdraw this money, you have to transfer it back to your external account, which could take a few business days. For those who need cash fast, each nail-biting day might make that high yield not worth the stress. So you might have to diversify. Truthfully, it's best to keep a little money within easy access for emergencies, but not so much that you miss out on today's high rates. If you've engorged your Chase Savings Account, take a look at some other top-paying savings accounts to see how much you could earn in interest. If your savings is anywhere near the median -- $8,000 -- you could potentially pick up at least $400 on your savings.

Does Your Income Make You Upper Class, Middle Class, or Lower Class?

By: Christy Bieber | Updated Sept. 5, 2023 - First published on Sept. 5, 2023

Incomes vary widely across the United States, with some people making many times the amount that others earn. If you've ever wondered how your personal finances stack up, and what "class" your income officially puts you in, here's what you need to know.What income do you need to be upper, middle, or lower class?Based on 2021 data, here's what you would need to earn in order to be in each class:Lower class: This is defined as the bottom 20% of earners. Those in the lower class have an income at or below $28,007.Lower middle class: This is defined as individuals in the 20th to 40th percentile of household income. Earnings among this group are between $28,008 and $55,000Middle class: The middle class is officially those whose earnings put them in the 40th to 60th percentile of household income. The income range is $55,001 to $89,744.Upper middle class: Anyone with earnings in the 60th to 80th percentile would be considered upper middle class. Those in the upper middle class have incomes between $89,745 and $149,131.Upper class: Finally, the upper class is the top 20% of earners and they have incomes of $149,132 or higher.Take a look at these numbers and see where you fall based on your own earnings. And remember, this is a snapshot in time -- your earnings can change throughout your life, and so can your class designation.Will your success be determined by your income and class?It's probably not a surprise that those in the upper classes or in the upper middle class do have a higher net worth than those in the lower class or the lower middle class. But the disparity is greater than you might think. While the median net worth of those with incomes of $149,132 or higher is $805,400, the median net worth of those in the lower class is just $12,000.Your income impacts how easy it is for you to build wealth. If you make more money, it is easier to save it and invest it in a brokerage account where it can work for you. If you make less money, then you may struggle even to cover the necessities out of your checking account, much less to buy valuable assets that help you grow richer over time.But that doesn't mean people who don't make a lot of money can't be a financial success. A lot depends on what you do with the money you actually have, including how much you spend and how much you save.There are plenty of people who make over $100,000 a year who live paycheck to paycheck, and plenty of people with incomes that put them squarely in the lower or lower middle class who have diligently saved and grown quite wealthy over many years.Here's how you can improve your standingDon't be discouraged if you aren't in the class you hope to be. For one thing, you have opportunities to increase your income by taking the following steps:Learning new job skills: You could obtain a certification, take part in a management training program at work, or take some classes to develop skills that may help you get promoted (such as computer training courses or public speaking classes), depending on your industry.Take on a side hustle: The average side hustle brings in $483 per month, which is a good amount of extra money that could make a meaningful difference in your income.Work some extra hours: If your company allows you to work overtime, take advantage of it, as many people are paid time and a half for overtime hours.Negotiate your salary: According to Pew Research, when workers negotiated for higher pay, 28% said they received the extra money they asked for and 38% indicated they were given more than originally offered but less than their ask. Whether you are getting a new job or staying at your current job but feel you're underpaid, it doesn't hurt to make a request for more money -- especially if you can find salary data to back up the fact that others in your industry are paid more.And even if your earnings never put you in the top 20% of earners, you can still have a rich life and end up with the financial security you deserve -- especially if you prioritize saving as much as you can for as long as you can.

The Hidden Downside of Always Flying Business Class

By: Lyle Daly | Updated Nov. 5, 2023 - First published on Nov. 5, 2023

I flew business class for the first time a little over five years ago, on an eight-hour flight back to the United States. While I had flown first class on domestic flights before, this was a whole new level of travel for me. A seat that turned into a bed? I was hooked. My immediate reaction was "This is how I always want to fly."And that's what I've done. Travel is one of the things I don't mind spending money on, so flying in business class is worth it to me. I've also used quite a few travel credit cards to cover the cost of some of that airfare in miles instead of cash.There's a lot to like about flying business class. The seats are definitely much more comfortable, especially when they're lie-flat seats. The meals can be pretty impressive, at least for something served on an airplane. Most people would probably assume there aren't any real downsides, besides the higher cost.It's mostly as good as advertised. But when you always fly business class, there is a potential downside that doesn't get talked about much.Your travel standards go way, way upA single flight in business class might not change the way you look at travel. It's nice, but you may consider it a one-time thing, or a way to treat yourself on special occasions.On the other hand, if you always fly in business class, then it's almost certainly going to raise your travel standards. You get used to that level of service and luxury. Now, this isn't necessarily a bad thing, but it does have consequences.For one, it becomes normal for you. It's hard to go back to flying economy once you've gotten used to the perks of business class. And even business class loses some of its magic. Don't get me wrong, I still love it. But it doesn't wow me nearly as much as it did the first couple of times. At this point, I know the drill.It doesn't just raise your standards for air travel, either. It will probably raise them across the board. When you always treat yourself to a nice flight, you may feel like you should do the same with your accommodations. No more hostels, questionable Airbnbs, or budget hotels. If you're going to get to your destination in style, shouldn't you stay in a nice hotel, too?There's a good chance you'll start expecting more from your travels. To get more, you usually need to pay more. Between airfare and hotels, you could end up spending much more than you used to.Embrace the change -- or don'tTo reiterate, there's nothing wrong with having high standards when you travel. Many people go from budget travel as young adults to more expensive trips as they get older. If you want to fly business class for every trip and stay in premium hotels, you shouldn't feel bad about it. Everyone has their priorities with how they spend their money.You should, however, be ready for the costs involved. It's not worth going into debt just so you can travel in luxury. Here are a few ways to finance those business-class flights, fancy hotel stays, and meals at Michelin star restaurants.Set up a travel fund and contribute to it every month. Open a high-yield savings account to serve as your travel fund. If you already have a savings account, you can also set up a sub-savings account specifically for travel. Then, decide how much you'll transfer to it every month.Cut back on other expenses so you have more money to spend on travel. If travel is a priority for you, that may mean spending less on other, less important expenses. For example, I haven't had a car for years because I can get around fine without one. Instead of an expensive car payment, I'd rather have more money I can spend on vacations. Part of improving your personal finances is deciding where you can spend and get the most out of your money.Get a travel credit card and use it to pay for all your purchases. Travel cards earn rewards that you can use to cover travel expenses. If you love to travel, it makes sense to have one of these credit cards. You can use it to pay for your regular expenses, and then use the rewards you earn to save on your travel costs.You may also discover that you're fine with any type of trip. Some travelers don't care about all the bells and whistles. There's no right or wrong way to travel. Just know that if you start making higher-end travel a regular part of your life, it can be hard to go back.

I Love Costco -- but Here Are 3 Products I Won't Buy There Again

By: Maurie Backman | Updated Nov. 21, 2023 - First published on Nov. 21, 2023

I shop at Costco weekly. And most weeks, I pick up groceries such as milk, cheese, fruits, veggies, and snacks.Although I'm a bit set in my ways when it comes to Costco buys, I'm also more than willing to take a chance on a new product. Case in point: A few years ago, I bought these Kirkland cashew clusters on a whim, and they've become one of my favorite snacks to bring along on a hiking trail.One of my favorite things about shopping at Costco is trying out different products. And another thing I love is reaping savings thanks to Costco's ultra-low prices. But I've also had my share of Costco purchases that just haven't worked out. These items fall into that category -- and I probably won't buy them at Costco again.1. AvocadosThe price of avocados at Costco varies based on the season as well as supply. But usually, a six-pack of avocados at Costco is equivalent to roughly three or four avocados at a regular supermarket where I live. That's what tempted me to buy avocados at Costco in the past. But I won't do that any longer because I've realized that avocados are just not a product I can buy in bulk.I've found that when I buy a batch of avocados, what'll happen is that they'll be rock hard...until they aren't. But it doesn't help me to have six avocados ripen at the same time. And yes, I've tried the paper bag method. I find that it shaves maybe half a day off of the ripening time, which means spacing things out doesn't really work.Consumers often risk losing money to food waste by buying the wrong products in bulk. So think carefully before doing the same, especially when it comes to produce that isn't ripe and ready to eat at the time you've bought it.2. Kirkland paper towelsKirkland paper towels tend to be a lot cheaper than Bounty, my go-to brand. A 12-count online costs $22.49, which is $2.19 per 100 square feet. Bounty costs $4.57 per 100 square feet, or $29.99 for a 12-pack of rolls. That's clearly a lot more expensive.But there's a reason I'm loyal to Bounty -- the stuff works. And when you have a household full of kids, you need a good paper towel.Although I normally find Kirkland products to be high in quality, its paper towels are the one exception. As such, I don't see myself buying them again.You may have a certain budget you're trying to stick to for things like toilet paper and other household essentials. But it's important to recognize when it pays to spend a little extra. In this example, Kirkland paper towels are considerably cheaper than Bounty. But if you need four sheets of Kirkland to do the job of one sheet of Bounty, you're not really saving money in the end.3. Sandwich breadBecause my daughters take a sandwich to school for lunch almost every day, we go through bread somewhat quickly in my house. But I still find Costco's two-pack of sandwich bread to be too large a quantity to buy at once.It's similar to the avocado issue -- only with the bread, I don't have to wait for it to become edible, because it's edible as soon as you bring it home. But because of that, I find that it tends to get moldy somewhat quickly. By the time I'm only part of the way into my second loaf, I have to toss it out.Buying in bulk can often be a big source of savings. But it's important to know which bulk items do and don't work for you. For me, bread is a no. Before you go shopping, think about your eating habits. You may find that even if you go through a lot of bread, you're better off paying a little bit more at the regular supermarket and buying one loaf at a time.Costco is a wonderful place to shop. But these three products no longer have a place on my Costco list.