WHAT IS THE DIFFERENCE BETWEEN A FIXED AND
A VARIABLE RATE?
A fixed interest rate means that the
rate of the finance charge does not change
throughout the duration of the extension of
credit. For example, a car dealer may offer
a loan for a car at 4.9%APR for 24 months;
this means the APR is fixed at 4.9% for the
duration of the loan (which is an instalment
closed-end credit loan).
Under a variable rate loan, the finance charge
is determined by an index, such as the “base
rate” published nationally for loans charged
by banks. This enables the lender to charge
an interest rate that reflects current market
conditions. Many credit card issuers charge
a base interest rate plus an indexed rate
to assure them adequate return on the loans
that they extend.
When shopping for credit, it must be noted
that there is a difference between fixed and
variable rates. Some lenders now extend credit
on a fixed basis – but only for a short duration
after which the APR becomes variable. It is
important for you to read the fine print of
the contract to know how the APR will be set.
To determine which is better for you, crunch
the numbers – determine what the amount of
credit you will use over the life of the loan
and apply the applicable credit rate. You
could discover that a higher initial APR will
result in a lower finance charge over the
duration of the loan. |
