What is the key difference between fixed and variable interest rates?

The key difference between fixed and variable interest rates lies in their behavior over time. A fixed interest rate is established at the start of a loan or investment and remains constant throughout the term, providing predictability in monthly payments and total interest paid over the life of the loan. This stability can make budgeting easier for consumers, as they know exactly what to expect in terms of payment amounts.

In contrast, a variable interest rate can fluctuate based on market conditions or a specific benchmark, which means that payments may increase or decrease over time. This variability can lead to initially lower rates compared to fixed rates, but it also comes with the risk of future increases in payments, making budgeting more challenging.

Understanding this distinction is crucial for making informed financial decisions, as each type of interest rate serves different needs and risk tolerances for borrowers or investors.