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How do I decide between a fixed interest rate and a variable one?

When choosing between a fixed or variable interest rate loan, you should consider the length of the loan, how much you value predictability in your budget, and the current interest rate environment.

A fixed rate loan has the same interest rate throughout the life of the loan. One reason borrowers, especially those with long-term loans, like fixed rate loans is that they provide a kind of “interest rate insurance” — they cost a little more, but that premium protects you against price changes down the road.

A variable interest rate loan’s APR will fluctuate over time based on an interest rate index known as 1-Month LIBOR. This means that your monthly payment can also change as interest rates change, since your minimum rate and minimum payment are not locked in like they would be with a fixed interest rate. You can view historical 1-month LIBOR rates here. Interest rates on variable rate loans are capped at 8.95%, 9.95%, or 11.95% depending on the term of your loan and state regulations, so the rates could never go above those caps in case a change in the market raises interest rates beyond those limits.

You can also refer to our blog post about the difference between fixed and variable interest rates for more details.

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