How does a fixed interest rate differ from a variable interest rate?

A fixed interest rate maintains a constant percentage throughout the life of a loan or an investment, meaning that the borrower knows precisely how much interest they will pay over time. This consistency allows for easier budgeting and financial planning since the amount due will not change. In contrast, a variable interest rate can fluctuate based on market conditions, typically indexed to a benchmark rate. This means that the borrower might experience changes in their payments over time, which can make financial planning less predictable and potentially more expensive if rates rise.

The other options do not accurately describe the differences between fixed and variable interest rates. A fixed rate is not always lower than a variable rate, as the initial terms can vary based on the lender, the borrower's creditworthiness, and market conditions. Additionally, a fixed rate is not restricted to long-term loans; it can be applied to short-term loans as well. Lastly, variable rates are not necessarily more predictable since they can change based on external financial factors, making their predictability less reliable than a fixed rate.