Fixed Apr vs. Variable Apr: Understanding the Differences

APR, or your annual percentage rate, is your interest in the form of a yearly rate. Your APR is important because it may include origination fees, giving insight into how much you’ll be paying over time to take out a loan.

There are different types of APR—fixed and variable—with their own benefits and drawbacks. Read on to learn more, but also consider taking a look at our beginner's guide to DeFi loans.

What Is Fixed APR and How Does It Work?

Fixed APRs have a fixed price, remaining the same payments every month throughout the loan's lifetime. Hence the name, “fixed APR.” Rates depend on current market conditions. Vehicle and home loans usually have fixed APR rates.

Borrowers can expect consistent, unchanging monthly payments to repay their loan(s). Therefore, this option is typically the safer choice, although you won’t have the chance to save on interest with the periodic shifts to the index.

Pros and Cons of Fixed APR

You’ll want to consider a few things with a fixed APR. Here are the key points:

Pros

• No chances of your rate increasing
• More predictable monthly payments, making it easier to budget

Cons

• You can expect higher starting rates compared to variable rates
• If variable rates drop lower, you may miss out on an opportunity to save more on interest

When Fixed APR Is Ideal

• Interest rates are increasing
• You do not foresee paying your loans off soon
• You are repaying student loans or need to budget carefully

What Is Variable APR and How Does It Work?

Variable APRs in TradFi can and usually will change over time. These changes to your APR occur because this type of APR is based on the index interest rate. An excellent example of this would be Wall Street Journals’ prime rate. If the prime rate increases, so does your annual percentage rate. Many credit cards offer variable APR depending on certain factors.

Borrowers can expect rates that fluctuate and change over time, posing the risk of price increases interfering with their financial situation. However, starting rates are usually pretty appealing and noticeably lower than fixed APR.

Variable APR can fluctuate over time depending on the index interest rate, meaning that your loan repayments could vary from one month to the next.

Learn how to convert interest rate to APY on our blog.

Pros and Cons of Variable APR

There are a few things you’ll want to consider with variable APR. Here are the key points:

Pros

• Starting rates are usually lower compared to fixed rates
• You may be able to save on interest if variable rates don’t increase too much

Cons

• Unpredictable payments as the amount can and will change over time
• The total amount of monthly payments could change if the rate changes

When Variable APR Is Ideal

• You plan to repay your loans soon
• Interest rates are decreasing

The Difference Between Fixed APR and Variable APR

Fixed APR is a safe and consistent choice. Variable APR may provide borrowers with lower starting interest, but it comes with more risk. This is because changes to the index interest rate will affect you each time, whereas the fixed rate is decided on current market conditions and remains the same through the duration of the loan.

Conclusion

Fixed APR may be more suitable for those paying off student loans or others who need to budget carefully, as consistency can provide more financial stability. You’ll be able to calculate your monthly payments and know exactly how much needs to be set aside without worrying about anything changing. This option is best for those who can’t repay their loans quickly.

Variable APR is typically riskier. However, there is always the chance that you could save on interest with changes to the index. If you plan on paying off loans relatively soon and notice interest rates are decreasing, a variable APR may be a good option.

Deciding which one is best for you depends on your financial situation and your personal preferences.

Thinking about paying a loan in digital currency? Read our guide to getting a crypto-backed loan.