What is the main difference between fixed and variable interest rates?

The correct choice highlights the fundamental characteristic that distinguishes fixed interest rates from variable rates. Fixed interest rates are set at a specific percentage and remain constant throughout the duration of the loan or investment, providing certainty in repayment amounts and interest earnings. This stability is beneficial for budgeting and long-term financial planning, as individuals know exactly what to expect in terms of interest payments.

On the other hand, variable interest rates are subject to fluctuations based on market conditions or changes in a benchmark interest rate, such as the prime rate. This means that the interest charged on a loan or earned on an investment can increase or decrease over time, leading to potentially lower initial payments but greater uncertainty regarding future costs or earnings.

Understanding this distinction is crucial for consumers when choosing between financial products, as it affects not only their immediate financial obligations but also their long-term financial strategy.