Fixed Rate

A fixed rate loan has a fixed interest rate for the life of the loan, or a portion of the life of a loan. The interest rate is the price of renting money. There is no such thing as a free lunch, so when you borrow money, you have to pay to use that money loaned to you. Banks accept money from depositors who are paid interest in return for their dough. Banks then they loan out those deposits and charge money for loaning out depositors’ money. Banks earn money by charging borrowers interest at greater rates than they pay depositors for the safekeeping of their dough.

Example:

You borrow $500,000 to buy a home. The bank will look at your credit-worthiness and income to determine risk. If the risk of loan repayment is low, the interest rate charged to the borrower will usually be lower. The more perceived risk in lending, usually, the higher the interest rate will be. So the bank sets your interest rate at 4% for the life of the loan. If the borrower chooses a 30-year loan structure, then the borrower's payments will be the same at a fixed rate for 30 years at about $2,100 per month.

See: Fixed Interest Rate.

Related or Semi-related Video

Finance: What is the difference between ...6 Views

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Finance allah shmoop what's the difference between a fixed and

00:05

a floating rate All right well we'll just start this

00:09

one out with your favorite time Donald and melania need

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to borrow money to buy a building here's the history

00:20

of ten year t bill costs for the last few

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decades Well rates were almost ten percent in the nineteen

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seventies and then they fell all the way to being

00:29

almost free in two thousand eighteen Well if donald had

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borrowed money nineteen eighty to buy a building with us

00:37

fixed rate he'd have had to pay about ten percent

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interest for all this time That raid in nineteen eighty

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was fixed and you know i'd be paying ten percent

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for thirty five years very expensive rent on that money

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It's not like a dog who can't you know have

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pups different kind of fixed you know it's fixes in

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he won't move Position is just a set number fixed

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in place All right well donald would have overpaid massively

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in his loans by paying ten percent interest when he

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could have been paying seven percent here and four percent

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here And maybe like two percent change here if the

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loan he'd taken out in nineteen eighty was floating well

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it would have floated downward along the way like that

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Well most for floating loans have a preset set of

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terms which move along with the rates of the fed

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charges to loan money to banks who then mark up

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the loans a bit and resell the money to really

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borrowers like donald and kill you and me That is

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the floating rate might be set at quote the average

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federal funds rate plus ah hundred faces points over the

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trailing six month period to be reset every month Unquote

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Yeah something like that So in this case his rate

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would have floated downward And obviously things can go the

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other way as well Joe six pack it's a mortgage

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for a home he can barely afford today Eight hundred

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grand mortgage at four percent Well it cost him thirty

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two grand a year to rent that money just the

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interest and he has to make principal payments as well

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So is total payments or something like forty grand a

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year in year one of thirty Well if rates go

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back up and they easily could and become say seven

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Percent instead of that four percent a few years later

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three four five years later Well then all of a

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sudden his cost of renting that money goes from thirty

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two grand a year in interest costs too something like

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fifty or sixty grand a year in interest costs And

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joe six pack because he didn't fix his raid at

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that four percent figure when he borrowed it let things

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float and well he ended up you know living in

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his car when he couldn't afford paying The mortgage owns

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home anymore and had to sell it And so yeah

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he's living in his suv down by the river But 00:02:45.5 --> [endTime] luckily for him that suv floats

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