What is a Fixed Rate Payment?

A fixed-rate payment refers to an instalment loan with a Fixed Interest Rate that does not alter throughout the course of the loan's life. The monthly amount will also remain the same, although the proportions toward paying down interest and principal will differ.

A fixed-rate payment is frequently referred to as a "vanilla wafer" payment, owing to its predictability and lack of surprises.

Working of Fixed Rate Payment

In most mortgage loans, a fixed-rate payment agreement is used. Homebuyers typically have the option of choosing between fixed-rate and adjustable-rate (ARM) mortgage loans. Floating Rate mortgages are sometimes known as adjustable-rate mortgages. Homebuyers usually have the option of deciding which loan type is best for them.

In most cases, a Bank will provide a choice of Fixed-Rate Mortgage loans, each with a slightly varying interest rate. For example, a homebuyer can often choose between a 15-year and a 30-year term.

A variety of adjustable-rate loans are also available from banks. In the past, these may have had a lower initial interest rate than fixed-rate payment loans. When interest rates were low, homeowners could often secure an even lower introductory rate on an adjustable-rate mortgage, allowing them to pay less in the months following the purchase. As interest rates rose after the promotional period, the bank increased the rate and payment amounts. When interest rates were high, banks were more likely to grant introductory rate breaks on fixed-rate loans because they expected new loan rates to fall.

Fixed-Rate Loan Types

The following are the most common fixed-rate loan types:

Loans for Automobile

A car loan is a fixed-rate loan requiring the borrowers to pay monthly at a set rate for a set period. A borrower must pledge the motor vehicle being purchased as Collateral when applying for an auto loan. The borrower, as well as the lender, also agree on a payment schedule, which could include a down payment as well as recurring principle and interest payments.

Assume a borrower takes out a loan of INR 20,000 to buy a truck, with a 10% interest rate and a two-year repayment period. For the loan duration, the borrower will be required to make monthly instalments of INR 916.67. For example, if the borrower puts down INR 5,000, they will be responsible for INR 708.33 in monthly payments for the loan duration.

Mortgage

A mortgage is a fixed-rate loan used by borrowers to purchase a home or other Real Estate. The lender agrees to offer cash upfront in exchange for fixed monthly payments over a certain length of time in a mortgage agreement. The borrower takes the loan for buying a house and then uses the house as security until the loan is completely paid off.

A 30-year mortgage, for example, is one of the most prevalent fixed-rate loans, and it consists of fixed monthly payments spaced out over 30 years. Amounts paid towards the loan's principal and interests are referred to as periodic payments.