Final answer:
The primary difference is that a fixed interest rate stays the same throughout the loan term, while a variable interest rate can change. If inflation decreases, a homeowner with an adjustable-rate mortgage may benefit from lower interest rates and payments. This reflects on the secondary loan market's valuation of loans.
Step-by-step explanation:
The primary difference between a personal loan with a variable interest rate and one with a fixed interest rate is how the interest rate can change over the life of the loan. A fixed-rate loan maintains the same interest rate from the time the loan is taken out until it is fully repaid, regardless of changes in the market interest rates. On the other hand, a variable-rate loan has an interest rate that fluctuates based on an index rate, such as the prime rate, and therefore the payments can increase or decrease during the term of the loan.
If inflation falls unexpectedly by 3%, a homeowner with an adjustable-rate mortgage (a type of variable-rate loan) would likely see a decrease in their mortgage interest rate, assuming market interest rates fall in response to the decrease in inflation. This could lead to lower monthly mortgage payments. It is important to note that this trend could also potentially affect the secondary loan market, where loans are bought and sold between financial institutions, as changes in interest rates influence the value of these assets.