How does a fixed-rate loan differ from a variable-rate loan?

A fixed-rate loan is characterized by a constant interest rate throughout the life of the loan, which means that the borrower’s monthly payment remains the same. This predictability helps borrowers budget their expenses, as they are not affected by fluctuations in interest rates that can occur in the broader economy. In contrast, a variable-rate loan has an interest rate that can change at specified times based on the performance of a benchmark interest rate or index, which means payments can vary over time, potentially leading to higher costs for borrowers if rates increase.

The other options do not accurately describe the fundamental differences between fixed-rate and variable-rate loans. For instance, a fixed-rate loan is not limited to short terms; it can be structured for various durations, from a few years to several decades. Additionally, fixed-rate loans are not exclusive to banks, as various financial institutions like credit unions, online lenders, and other entities offer them as well.