Terms like "fixed rate" and "flat rate" can often confuse consumers. In general terms, a fixed rate is an interest rate that applies to a loan, while a flat rate is a method of payment that someone charges. The two terms apply in different situations, with a fixed rate referring specifically to interest rates, and a flat rate referring to the way someone charges for a service.
Fixed Interest Rates
Fixed interest rates are typically found in financial instruments that a lender provides to a borrower, such as a mortgage, credit card, municipal bond or certificate of deposit. A $10,000 certificate of deposit, for example, might come with a one-year term and a 3 percent interest rate. This means that at the end of the one-year period the bank will pay the certificate holder $10,300, or the original investment plus 3 percent.
Fixed Versus Variable
Consumers often come across fixed interest rates as opposed to variable rates. As the names imply, a variable interest rate, also called an adjustable rate, is one that is subject to change over time, while a fixed rate stays the same. For example, a fixed rate credit card will charge a user the same interest rate for a specific period, while the rate on a variable rate card can change depending on the terms of the credit card agreement.
A flat rate, also called a flat fee, is simply a way some service providers charge customers. For example, an accountant might tell you that he'll charge you $250 to prepare your individual tax return. This means that he will perform the specified job at that specific price.
Flat, Hourly and Contingency Rates
Flat rates are often used whenever a service provider, such as an attorney, accountant or mechanic, provide a specified service. However, providers can also pay based on an hourly rate or even on a contingency rate. For example, a mechanic might tell you that she'll repair your car for $60 an hour. She'll then charge you based on how many hours she took to complete the repair, multiplied by $60.
A contingency fee, on the other hand, is only charged if the provider obtains a certain outcome. For example, an attorney might charge a client on a contingency fee basis. If the attorney wins the case, he will receive a percentage of the winnings, but will not get paid anything if he loses.
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