Fixed vs. variable interest rates
There are two basic types of interest rates: fixed and variable.
Fixed interest rates
When you get a fixed-rate loan with a set repayment term, the interest rate will be locked in for the entire term of the loan regardless of whether the Fed raises rates.
A major benefit of this kind of loan is that you will know in advance how much the total cost of borrowing will be. And when you have a set regular monthly payment, you’ll know exactly when the loan will be paid off.
Variable interest rates
The interest rate on a variable-rate loan can fluctuate throughout the loan term depending on whether the Fed changes interest rates because of what’s happening in the broader economy.
Even if your minimum monthly payment remains the same, less of your payment goes toward paying down the principal if your interest rate increases—which means you are further away from paying off your debt.
How do rising interest rates affect you?
When the Fed raises rates, you might pay more if you have a variable-rate line of credit, credit card, or other variable-rate loan. In particular, credit cards often have higher variable rates, which can become more expensive if interest rates rise.
That’s why it can be a good idea to consolidate variable-rate debt into one fixed-rate loan. You might save money on interest and even pay off debt faster. In fact, 88% of surveyed debt consolidation customers told us they expect to pay off existing debt sooner with a Discover personal loan, with the majority of them reporting that they will pay it off an average of 2 years*
If you’re interested in seeing how much you might save on interest compared to a higher-rate loan, you can use our debt consolidation calculator. A loan for debt consolidation could also simplify your finances with one set regular monthly payment.
What is the best way to combat rising interest rates?
The first step is to look at the interest rates you’re paying to see if they’re fixed or variable.
“Always begin by taking stock of your financial objectives, obligations, and resources. Then you can use that information to decide how much to borrow, how long to borrow, and what payments you can afford,” said Ma. “If you’re unsure how to do this, you may want to consider getting help from a qualified financial advisor.”
Interest rates are not expected to decrease until 2024,2 so now is a great time to consider a personal loan with a fixed rate and term.
That way you can lock in an interest rate that won’t change for the life of the loan, no matter what happens in the broader economy.
Either way, when you’re armed with information, you’re in a great position to keep your finances on track.
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