Personal Credit Cards

Fixed APR vs. Variable APR: Here’s Everything You Need to Know

Article Summary

Fixed interest rates will almost always stay the same for the term of the loan. Variable interest rates are subject to change based on varying market conditions. Variable APR can be better for those who are comfortable with the additional risk, while fixed rates are better for those who want stability and predictability.

What’s the difference between fixed and variable APRs?

Are you currently shopping for a credit card, mortgage, or any other type of loan? If so, one of the first questions to ask yourself is which type of annual percentage rate (APR) is right for you. You have two options: fixed and variable. Lenders must disclose the interest rate and terms of a loan to the borrower, but there are also ways to calculate it on your own.

Knowing the difference between the two is extremely important. A loan with a fixed APR has an interest rate that stays the same throughout the life of the loan. However, it isn’t 100% guaranteed that your rate won’t change. There are certain circumstances that could make an interest rate change possible.

A variable APR, on the other hand, will fluctuate with the market. As interest rates shift with market conditions, so will the APR on your loan. That, of course, can be either good or bad, and it could result in interest rate increases, making variable-rate loans the more risky option.

Pros and cons of VARIABLE interest rates

A variable interest rate loan offers the potential benefit of lower payments in the future – but not without its risks. You may end up with higher payments instead.

If interest rates are expected to rise, a variable-rate loan will often start lower than its fixed-rate counterpart. So if rates drop – or rise more slowly than expected — a variable-rate loan could end up costing less than a fixed-rate loan.

But if interest rates continue to rise, so will the cost of your variable-rate loan. If that’s the case, your variable rate could eventually surpass the fixed APR and wind up burning a deeper hole in your pocket at the end of the day.

While variable APRs often yield a lower overall cost, its “high risk/high reward” nature isn’t for everyone.

Here’s a general rule of thumb: a variable rate loan is primarily geared toward shorter terms and borrowers with a sizable cash flow.


Here is a list of the benefits and drawbacks to consider when considering variable interest rates.

  • Potentially lower interest rates.
  • Can save you money.
  • Harder to budget.
  • Interest rates (and monthly payments) can increase at any time.

Pros and cons of FIXED interest rates

A fixed interest rate loan offers more predictability and stability than a variable APR. However, the security of a fixed interest rate comes at the expense of relatively higher interest rates.

But unlike a variable-rate loan, with a fixed interest rate, your payment amount won’t change. You’ll know exactly how much you owe each month, making it easier to properly budget. The downside is that you won’t be able to reap the benefits if APRs drop, as they sometimes do.

On the other hand, it isn’t always guaranteed that your APR won’t change. This is particularly true when it comes to credit cards.


Here is a list of the benefits and drawbacks to consider when considering fixed interest rates.

  • Predictable payments.
  • You know exactly how much the loan or line of credit will cost you.
  • Makes budgeting and financial planning easier.
  • Typically more expensive.
  • Don’t benefit from lower rates when they drop.

Are fixed or variable interest rates better?

It may be tough deciding which type of APR is best for you. When taking out a loan, many people are torn between the security of fixed APRs and the potentially lower payments of variable APRs. Many credit cards, for example, offer 0% introductory APRs, which can confuse things further.

The right choice depends on your financial situation, the type of credit, and personal preference. The best strategy is to compare several lenders and ask for quotes for variable and fixed rates whenever available. If you are on a fixed income and don’t have much of an emergency fund to rely on, you probably should go for a fixed APR source of credit, since variable rates can change monthly in response to market conditions.

Fixed rates and refinancing

If you have the type of loan that can be refinanced, such as a mortgage or auto loan, you may want consider choosing a new loan with fixed rates. If rates go down, you can refinance and take advantage of the lower rates.

However, this isn’t an option for all loan types. So make sure you know what you’re getting yourself into before taking out a loan. Most credit cards, for instance, don’t permit refinancing. And student loans have tricky rules when it comes to refinancing.

Make sure you’re aware of the terms if you decide to refinance. Refinancing can also be a great way to consolidate debt.

Key Takeaways

  1. Variable rates fluctuate with changing market conditions.
  2. Fixed interest rates do not change even if market conditions do.
  3. Personal loans usually have fixed rates while credit cards almost always have variable rates. Mortgages, on the other hand, offer both types of rates.
  4. Thoroughly investigate all loan options to find out what is best for you before committing to any type of loan.

Frequently Asked Questions

Here are some frequently asked questions regarding fixed and variable rate loans.

Is student loan debt fixed or variable?

Student loan interest rates can be either variable or fixed, depending on whom you are borrowing from. Generally speaking, government loans will be fixed, while private loans offer a wider variety of options, including fixed and variable interest rates. It is possible for borrowers to have have a mix of variable and fixed rates if they have several student loans. Adjustable student loan rates are subject to the same influences as adjustable rate mortgages, so they can change throughout the term of the loan.

What is an adjustable-rate mortgage?

An adjustable-rate mortgage, also known as an ARM, comes in a few different options and is a great example of a variable rate loan. Generally, the interest rate on them will be fixed for a certain period, for example, 5, 7, or 10 years. Then, each year after that for the remainder of the loan term, the rate becomes adjustable and can move 1% per year. In exchange for this variability, these loans usually come with a lower initial APR, making them an attractive option, but perhaps also a risky one, since it is impossible to know with certainty what will happen to interest rates in the future.

Do credit card rates change?

Credit card issuer could change your interest rate for multiple reasons, such as:

  • You’re late on your payments.
  • The period on your promotional rate has ended.
  • You’ve finished a debt management program.
  • Changes in the prime rate (a national index used by banks to determine consumer interest rates).

You can find more information on what might cause an interest rate increase (or other changes) by going to the website of your credit card issuer.

What is an index rate?

An index rate loan is a variable rate loan in which the interest rate is tied to a specific measure, such as the prime rate or U.S. Treasury Bills. As the underlying index moves, the interest rate on the loan or credit card moves along with it, proportionally.

Can fixed-rates change over time?

Typically, fxed APR loans never change. Credit cards that offer fixed APRs (only a few offer this feature) are an exception. Credit cards with fixed APRs can change for several reasons, such as being late on your payments, getting a cash advance, or an intro APR offer ends. In any case, they must notify you in advance before any changes go into effect. This will give you time to decide whether you want to:

  • Keep the card with the new, increased rate.
  • Close the account and pay it off.
  • Transfer your balance to a new card.

What do interest rates depend on?

The interest rate on your loan is subject to a few outside influences. The most important influence is overall economic conditions. More specifically, it depends on how easy or difficult it is to borrow money, that is, on the interest rate environment. This depends on a few things, including the prime rate. This is also referred to as the prime index. The prime rate is the rate that banks charge their most creditworthy corporate customers to borrow money.

The Federal Funds Rate also plays an important role. In Great Britain, the nearest equivalent to the Federal Funds Rate is the London Interbank Offered Rate. Both indexes reflect how expensive it is for banks to borrow money from each other. In turn, this affects credit cards, mortgages, student loans, and many other types of loans. In short, when it is easier for banks to borrow money, i.e., when there are lower rates, it becomes easier for credit card holders, mortgagees, etc. to borrow money as well. The opposite is true too — when the Federal Funds Rate increases, so do other interest rates.

The Federal Reserve can control this rate through the Federal Open Market Committee, and the interest rate changes are readily available online with a simple search or by looking through the Fed’s web page.

Does credit score play a role in interest rates?

Yes, credit score plays a role in both fixed and variable interest rate loans. Those with higher credit scores will receive better loan terms and options than those with lower credit scores. This is true of student loans, credit cards, mortgages, and virtually every other type of loan. In order to improve your credit score and get more favorable rates, it is important to decrease credit card balances, pay bills on time, and keep your credit card open for a longer period of time. If you don’t already have a credit card, opening one may help boost your credit score. Check out a list of the best credit cards, best personal loans, and best mortgage lenders to find the one that is best for you.

Getting Started

Whether you decide a fixed or variable APR is right for you, it’s important that you understand all the details of the loan before signing on the dotted line. By doing so, you won’t be blindsided by hidden fees or sudden APR changes.

Different personal loans come with different rates, fees, and requirements, so check out what the best personal loans are to ensure that you choose the best option for you. Rest assured that although your interest rate may change, your overall loan amount will not.

So if you’re seeking a credit card, personal loan, home loan, or any other type of loan, do your research and narrow down your top options to find the best one for you. In some cases, you may even be able to find a zero APR auto loan depending on the dealer and your creditworthiness.