Meaning: Fixed Interest Period

Fixed interest period is a term used for both private and commercial financing. It also appears in connection with all conceivable types of loans.

A fixed-interest period can be agreed for a mortgage just as for a car loan or a consumer loan. The fixed interest period in a credit agreement indicates for which period a fixed interest rate is agreed. For this reason, such loans are also referred to as fixed-rate loans.

An agreed fixed interest period gives both the lender and the borrower the opportunity to plan expenses and income for that period with certainty. During the fixed interest period the risk of changes is eliminated for both parties, which, in loans without a fixed interest period, arises from fluctuations in interest rates on the national and international financial markets. This can be both an advantage and a disadvantage.

If, for example, a fixed-rate loan is taken out during a period of generally low interest rates, this can prevent general interest rate increases from affecting your own loan. In periods of generally high interest rates, experts advise examining fixed-rate loans very carefully, because otherwise you might miss out on potential benefits resulting from falling interest rates on the global financial market. Therefore, when you want a fixed interest period for a loan, an individual assessment of the current market situation and the emerging trends in the financial markets is always necessary.

Possible terms for the fixed interest period

The negotiable durations of a fixed interest period depend solely on the wishes of the contracting parties. They can be agreed for a few months just as well as for the entire term of a loan.

Fixing the interest rate for the entire term is common, for example, with consumer loans and small loans. In mortgage financing, contracts often fix the interest rate for several years. Whether that is five or ten years depends on the general market situation and the individually agreed interest rate level.

If a decrease in the interest rate level is expected, lenders tend to secure longer fixed interest periods. If signs on the financial market indicate that interest rate increases could occur in the short term, usually only short fixed interest periods are available.

Interest rates

How high the agreed interest rates are for fixed-rate loans depends on several factors. General market data play a role, but the creditworthiness of the borrower is also taken into account. In addition, the assessment of the default risk by the lender influences the rate. The borrower can, for example, influence this by offering collateral.

A fixed interest period with low interest rates can usually be achieved with quickly realizable collateral. These include savings deposits and insurance credits. Mortgaging real estate would also be a viable way to obtain lower interest rates, although the resulting incidental loan costs must be weighed against the achievable interest advantages.

What is meant by a prolongation for the fixed interest period?

If a credit agreement includes the option of a prolongation, this means that the terms of a loan can be fixed again in the same form for the same period. Using this prolongation option is worthwhile for the borrower when interest rates have risen in the meantime.

The term "Rollover" is also used in connection with the fixed interest period. It applies when, after the originally agreed fixed interest period has expired, a new period with changed conditions is added to the loan agreement. This is also possible for both private and commercial loans. In the case of prolongation and rollover, it is common for the lender to allow the borrower the option to repay part or all of the loan.

During the term of a fixed interest period, a free interim repayment or complete repayment of a loan is usually not possible. The purpose of such a clause in the loan agreement is to guarantee the lender a minimum level of income from a loan.

Possible additional agreements to a fixed interest period

If a fixed interest period is agreed in a loan agreement, it does not necessarily mean that the borrower must pay an unchanging interest rate. A tiered interest rate can also be agreed. This does not impair the characteristic feature of predictable and fixed interest rates. Depending on the market situation at the time the loan agreement is concluded, both increasing and decreasing interest rates can be agreed.

A clause excluding the borrower's right to terminate a loan during the fixed interest period does not have to be separately stated in the loan agreement, as this is already anchored in Paragraph 489 BGB.

This statutory regulation allows an exception only if the fixed interest period exceeds a period of ten years. The borrower can only make use of this exception after ten completed years of the loan term and must observe a notice period of six months.

The legislator has created another exception for unsecured consumer loans. Here, termination is possible after six months of completed term with a notice period of three months despite the fixed interest period.

Partial prepayments

Even if a longer fixed interest period is part of a loan agreement, the contracting parties can agree on the possibility of partial prepayments. The usable timing is already specified when the loan agreement is concluded. Concrete agreements are also made about the amounts of possible partial prepayments. These could be fixed amounts.

Alternatively, percentages of the respective remaining loan balance can be included in the agreement to define the amount of a partial prepayment. This distinguishes fixed-rate loans from loans with a variable interest rate, where the borrower can make repayments of any amount whenever the interest rate is adjusted.

Another possible additional agreement for a fixed-rate loan is the currency in which the loan amount is disbursed and in which the installments of interest and principal must be paid. This is necessary when it is a loan from abroad. It is often chosen because, as a rule, such financing is not recorded with Schufa.

You can particularly benefit from a foreign loan in a third currency if prospects suggest that the euro could strengthen. However, in this case you should inform yourself very carefully about how the possibilities of premature termination are legally regulated in the country of origin of the fixed-rate loan. They sometimes show significant differences from the general rules customary in Germany.