Understanding Floating and Fixed Interest Rates: Should You Swap?

2/18/2021

By: Tom Jordan, Central PA Market President, Univest Bank and Trust Co.

Interest rates are currently at record lows due to the Federal Reserve’s response to COVID-19 and will likely stay low until the U.S. has recovered economically from the pandemic. With such low rates, business owner borrowers may want to consider an interest rate swap if they are looking for a low, long-term fixed interest rate.

Fixed rate vs. floating rate
A fixed rate is an interest rate that will not change for the duration of a loan agreement. With this type of loan, businesses are immune to changing interest rates by settling on a long-term, fixed interest rate. For example, individuals who take out a loan with a 4% interest rate will pay this rate for the entire loan period and their payments will stay the same for the duration of the loan.

A floating rate is based on an index such as the London Inter Bank Offered Rate (LIBOR), or the Prime rate which is set by the Federal Reserve. One of the potentially attractive qualities about floating rates is that it’s a market-traded rate. This means the rate can float up or down depending on inflation and index movements which in turn impacts monthly payments on loans.

A floating rate will adapt to economic changes like we have seen in the past few years with the pandemic and economic turmoil, where a fixed rate will not. If a business owner with a fixed rate looks back over the last 10 years, they may find he or she could have potentially saved money in the long-term by utilizing a floating interest rate.

What is a rate swap?
Interest rate swaps allow businesses to exchange a floating rate for a fixed rate. Swaps might be ideal for borrowers with loan opportunities over $1,000,000 who are planning on holding the asset for the loan term and who are looking for construction-to-permanent financing, refinances or purchases financing. Some business owners might complete a rate swap with the goal of reducing exposure to fluctuating interest rates.

Is your business eligible?
Businesses must be Eligible Contract Participants to swap rates. There are multiple criteria to become an Eligible Contract Participant, such as having total assets that exceed $10,000,000, or multiple business owners with a combined net worth of $1,000,000. It’s important for business owners considering a swap to work closely with their lender to both ensure they meet one of the criteria to become an Eligible Contract Participant and decide if a rate swap is right for them. Understanding fixed vs. floating interest rates can help business owners ultimately maximize financial security and minimize potential costs.

In the current economic environment and with Federal interest rates at an all-time low, now may be a time to consider an interest rate swap. It’s important for business owners to understand how it works and how they could benefit the business and potentially save money in the long-
term. Interested in learning more about how interest rate swaps could work for you and your business? Univest is here to help. Contact us to begin a conversation.

Univest Bank and Trust Co. is Member FDIC, Equal Opportunity and SBA Preferred Lender.

14 Comments

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6/8/2023 01:52:00 am

Such a wonderful article. Happy to read your blog as it has many ideas with lots of knowledge which can be used. In the present economy, financial instruments such as loans and bonds have become an integral part of our lives. Interest rates play a crucial role in determining the cost of borrowing and investing. The nature of interest rates can be classified into two primary categories - fixed and floating. Fixed interest rates are predetermined and remain unchanged throughout the tenure of the loan or bond, whereas floating interest rates are subject to change in accordance with market fluctuations.

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9/6/2023 12:21:00 am

Thank you for sharing this thought-provoking perspective. It's refreshing to see a different take on the topic.

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10/6/2023 03:39:56 am

This is a very informative and timely blog post, especially considering the current economic climate shaped by the response to COVID-19. The discussion on fixed rate versus floating rate loans provides valuable insights for business owners.

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The explanation of the differences between fixed and floating rates is clear and concise. It's important for business owners to grasp the implications of these rate options, especially in a volatile economic environment. The example of a 4% fixed interest rate throughout the loan term effectively illustrates the stability offered by fixed rates, while the mention of market-traded rates and their susceptibility to economic fluctuations underscores the flexibility of floating rates.

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10/18/2023 08:12:34 pm

I found this article on interest rate swaps quite informative. With interest rates being so low due to the pandemic, it's crucial for business owners to consider their options carefully. The explanation of fixed vs. floating rates was clear and easy to understand. I appreciate the insight into how a fixed rate provides stability, while a floating rate can adapt to economic changes. It's interesting to think that in some cases, a floating rate might have saved money over the long term. The concept of rate swaps is intriguing, especially for larger borrowers, but it's crucial to meet the eligibility criteria. Overall, this article provides valuable information for business owners looking to make informed decisions about their loans and interest rates.

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2/7/2024 11:23:03 am

Thank you for your feedback! I'm glad to hear that you found the blog post informative and timely, particularly given the economic challenges stemming from the COVID-19 pandemic. Understanding the differences between fixed-rate and floating-rate loans is crucial for business owners, especially in uncertain economic times.
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2/13/2024 08:10:14 am

Understanding the difference between floating and fixed interest rates is crucial when considering whether to swap between them. Here's a breakdown of each type and factors to consider when making a decision:

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10/15/2024 12:02:04 pm

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Understanding Floating and Fixed Interest Rates: Should You Swap?

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