Fixed vs. Variable Rate Loans: Understanding Interest Rate Structures
Compare fixed and variable rate loans, understand how each works, and learn which structure suits your business needs.
Fixed vs. Variable Rates Explained
Business loans come with either fixed or variable interest rates. Fixed rates remain constant throughout the loan term, providing predictable payments. Variable rates adjust periodically based on a benchmark rate, meaning your payment can increase or decrease over time.
Each structure has advantages depending on interest rate environment, loan term, and your risk tolerance.
Comparing Rate Structures
Key differences between fixed and variable rates:
| Feature | Fixed Rate | Variable Rate |
|---|---|---|
| Payment Amount | Constant | Can change |
| Initial Rate | Usually higher | Usually lower |
| Rate Risk | None after locking | Can increase |
| Planning | Easier budgeting | More uncertainty |
| Best When | Rates expected to rise | Rates expected to fall |
How Variable Rates Work
Variable rates are typically tied to a benchmark plus a margin.
- Prime Rate: Most common for business loans
- SOFR: Secured Overnight Financing Rate (replaced LIBOR)
- Your rate = Benchmark + Lender Margin
- Example: Prime (7.5%) + 2% = 9.5%
- Rate adjusts when benchmark changes
- Some loans have rate caps limiting maximum rate
Choosing the Right Structure
Consider these factors when choosing:
- Loan term length (longer terms = more rate risk)
- Current interest rate environment
- Your cash flow sensitivity to payment changes
- Rate difference between fixed and variable options
- Whether rate caps are available
- Your ability to refinance if rates become unfavorable
Many SBA 7(a) loans have variable rates tied to Prime. If you prefer fixed rates, SBA 504 loans offer fixed rates for the CDC portion. Ask your lender about available options.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
Third-Party Lenders: All loan products are offered by independent third-party lenders. Liminal Lending Co. is an Independent Sales Organization (ISO) and receives compensation from lenders for successful referrals. Terms and conditions of any loan are between you and the lender.
Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.