Are Personal Loans Fixed or Variable? Everything You Need to Know

Personal loans are one of the most popular ways for consumers to access extra funds for major purchases or to consolidate debt. But before taking out a personal loan it’s important to understand the basics including whether personal loans have fixed or variable interest rates.

What is a Personal Loan?

A personal loan is an installment loan that provides a lump sum of cash upfront, which you then repay in equal monthly installments over a set period of time usually 2-7 years. The interest rate, fees loan amount, and term are all established when you take out the loan.

Personal loans can be used for almost anything – financing a home improvement project, paying medical bills, consolidating credit card debt, funding a wedding, or even taking a dream vacation. They provide more flexibility than other types of loans because there are generally no restrictions on how you can use the money.

Do Personal Loans Have Fixed or Variable Rates?

The vast majority of personal loans have fixed interest rates that do not change over the life of the loan. This means your monthly payment stays the same from month to month, making it easy to budget for.

Variable rate loans, where the interest rate fluctuates over time based on market conditions, are extremely uncommon with personal loans. Of the top personal loan lenders, nearly all offer fixed rate loans exclusively.

Here are some of the reasons why fixed rates are standard for personal loans:

• Predictability – Borrowers like knowing their payment will stay the same each month. This makes budgeting much simpler.

• Manage Risk – Lenders can more accurately assess risk with fixed rates since they know exactly how much interest they will earn.

• Stable Income – Fixed rate loans provide the lender with a stable source of interest income over the full loan term.

• Loan Terms – Personal loans typically have shorter repayment terms of 2-7 years. There is less incentive to offer variable rates for shorter duration loans.

• Qualification – Since personal loans are unsecured, borrowers need to meet minimum credit and income qualifications. This lower risk pool is suited for fixed rate products.

While adjustable rate mortgages and student loans sometimes offer variable rate options, this is extremely rare with unsecured personal loans from traditional lenders.

Comparing Fixed Vs. Variable Rates

Understanding the key differences between fixed and variable rates can provide more context on why fixed rates are predominant with personal loans.

Fixed Rates

• Interest rate remains the same over the full loan term
• Monthly principal + interest payment does not change
• Provides payment predictability
• Known interest costs over the full repayment term
• Lower risk for lenders

Variable Rates

• Interest rate fluctuates based on market indexes
• Monthly payment adjusts up or down with rate changes
• Harder to predict long term costs
• May start lower than fixed rates, but can rise over time
• Benefits borrowers if rates decrease
• Higher risk for lenders

It is easy to see why borrowers and lenders alike tend to prefer fixed rate loans. Borrowers gain predictability while lenders can better manage risk.

What About Introductory Rates?

While ongoing interest rates are fixed, some personal loan companies advertise introductory rates that are lower for a limited time, such as 3-12 months.

These introductory rates eventually expire and the ongoing fixed rate takes effect. While you enjoy lower payments in the short term, the interest rate is still fixed for the remainder of the loan after the intro period ends.

When Might Variable Rates Make Sense?

For most borrowers, a fixed rate personal loan is the best option. However, there are some limited scenarios where a variable rate could be beneficial:

• You plan to pay off the loan very quickly – A variable rate could start lower and you may pay it off before any increases occur.

• You can qualify for a lower rate – Some lenders reserve their lowest rates for variable rate loans, so you could get a better initial rate.

• You expect interest rates to decline – Your rate would go down if market rates fall.

Even in these cases though, the predictability and stability of fixed rates makes them preferable for most borrowers seeking a personal loan.

Alternatives to Variable Rate Personal Loans

Very few lenders offer variable rate personal loans. However, there are some alternatives if you are set on a loan with a variable rate:

• Home Equity Line of Credit (HELOC) – These resemble credit cards in that they offer variable rates and flexibility. However, you must own a home and use it as collateral.

• Credit Cards – Credit card rates fluctuate based on the prime rate. However, they carry higher rates and fees. Balance transfers or 0% APR deals may imitate a variable rate loan temporarily.

• Business Loans – Some startup business loans offer variable rates. But you must have an established business to qualify.

• Peer-to-Peer (P2P) Lending – A small subset of P2P platforms provide variable rate loans. These come with less predictable results and higher risk.

While these options mimic variable rate lending in some ways, each has significant drawbacks compared to traditional fixed rate personal loans.

The Bottom Line

Personal loans provide consumers with an accessible way to finance major expenses, consolidate debt, or access extra funds. While interest rates can vary across lenders, the vast majority of personal loans offer fixed interest rates and payments for the life of the loan. This predictability and stability is advantageous for both borrowers and lenders.

Variable rates are extremely uncommon with personal loans, outside of temporary introductory offers. And in most cases, the predictability and known costs of fixed rates make them the best option for anyone in need of a personal loan. By understanding the loan terms and interest rate structure upfront, you can make the most informed borrowing decision.