What is the difference between variable and fixed interest rates?

The correct choice highlights the fundamental distinction between fixed and variable interest rates in financial products. Fixed interest rates are characterized by their stability; they remain unchanged throughout the life of the loan or investment. This predictability allows borrowers or investors to budget effectively, knowing exactly what their interest payments will be over time.

In contrast, variable interest rates are tied to market conditions and can change at specified intervals. This means that while a borrower may initially benefit from lower interest payments when market rates decline, they also risk facing higher payments when market rates rise. The capacity of variable rates to fluctuate makes them less predictable than fixed rates. Understanding this difference is crucial for making informed decisions in personal finance and investments.