Variable vs fixed-rate loans
Variable vs fixed-rate loans
The jargon surrounding loans and credit agreements can be overwhelming for the average person. You’d be forgiven for not knowing the benefits of fixed-rate loans vs variable, the difference between APR and APRC, and how underlying interest rates impact it all.
Fortunately, this guide delves into variable-rate and fixed-rate loans to give you a better understanding before making a decision.
What are loan rates?
The term ‘loan rate’ refers to the interest rate charged when you borrow money. This is a fundamental element of a loan agreement created between a lender and a borrower. Mortgages, secured loans, personal loans, credit cards and most other types of borrowing are subject to them.
Interest rates are essentially the cost of borrowing money. A higher interest rate means you’ll repay more overall (the initial sum plus a percentage as interest), and vice versa. They’re usually displayed as an APR (Annual Percentage Rate) or APRC (Annual Percentage Rate of Charge), the latter more commonly used for secured homeowner loans and mortgages.
The loan interest rates available to you can vary massively depending on factors such as the lender, the type of loan you’re applying for and your credit history. However, they can also change during the loan term. This is where the question of fixed-rate vs variable-rate loans comes into play.
So, what are they and why is it important to understand the difference?
What are variable-rate loans?
Variable-rate loans have interest rates that can rise or fall at any time. As a result, your monthly repayments can also increase or decrease during the loan term. Understanding this is crucial to avoid nasty surprises after entering one of these agreements.
What factors influence variable interest rates on loans?
Most variable interest rate changes follow the movements of the Bank Rate, or ‘base rate’, set by the Bank of England. This can change in line with wider economic conditions and has a knock-on effect on all other interest rates, including variable-rate mortgages, personal loans, secured loans and credit cards.
The interest rate you start at is more tailored to you and the loan you’re taking out. However, the reasons for any changes to the interest rate during the term should be set out in the loan agreement and the lender’s terms and conditions. It’s always wise to check these before completing any application so you understand what can affect your variable rate.
Advantages of variable-rate loans
Potential for lower initial interest rates: Some variable-rate loans are offered with lower interest rates compared to fixed-rate agreements. This can make your initial monthly repayments more affordable.
Declining interest rates could save you money: If interest rates fall, so could the amount you owe and your monthly repayments. This can put money back in your pocket or allow you to repay the loan earlier than expected (if the lender allows).
More flexibility: Some lenders are more flexible when it comes to variable-rate loans, allowing you to repay more when it suits you. However, some may still have early repayment charges and restrictions.
Disadvantages of variable-rate loans
Uncertainty around repayments: Uncertainty is one of the biggest drawbacks of variable-rate loans. Without a fixed monthly repayment for the loan term, budgeting can be more challenging and you may have worries about increasing interest rates.
Higher repayments if interest rates increase: If rates rise, the interest on your variable-rate loan could increase with it. This means you’ll owe more and may need to make higher monthly repayments.
What are fixed-rate loans?
Fixed-rate loans have an interest rate that doesn’t change. They’re set at the start of a loan agreement and stay constant throughout a set fixed-rate period or the full term, even if the underlying Rates change.
The fixed interest rate you’re offered usually depends on the type of loan you’re asking for, the amount you want to borrow, your financial situation and your credit history, as well as the general interest rate market.
Mortgages can have fixed rates guaranteed for a number of years, usually between two and five. Once these terms have finished, you can remortgage to a new fixed rate or let the mortgage automatically switch to a standard variable rate (SVR).
Advantages of fixed-rate loans
Predictable monthly repayments: A fixed interest rate means set monthly repayments every month, making it easier to budget your money and plan your long-term finances.
Protection against increasing interest rates: If interest rates increase, you’ll be able to avoid paying more while you’re still on a fixed rate.
Simplicity and peace of mind: The certainty of fixed-rate loans may make the repayment process much simpler. They can also give you more peace of mind without needing to worry about potential interest rate rises.
Disadvantages of fixed-rate loans
Higher initial interest rates: If lenders expect interest rates to rise, fixed-rate loans are often offered with higher interest rates. You may also not get the discounts offered with variable loan rate agreements, meaning you miss out on savings with initial repayments.
Miss out on interest-rate drops: If rates fall, you won’t benefit from interest levels falling accordingly. This may mean you’re left paying a higher interest rate than is standard for the current market.
Could repay more overall: If you’re fixed at a higher interest rate while current variable rates are lower, you could be left repaying more than you need to overall.
Choosing a variable or fixed-rate loan
Ultimately, one isn’t necessarily better than the other. There are pros and cons to both fixed and variable-rate loans but the best for you depends on a few key factors. Consider the following:
Your tolerance to uncertainty: Sometimes, the certainty and peace of mind that come with fixed-rate loans and set monthly repayments are worth the risk of paying a little more than you need to if interest rates fall. If you have a little more tolerance to risk and uncertainty, a variable-rate loan could help you save with falling interest rates.
The financial products available to you: You may or may not have a choice when it comes to the loans available to you. Some lenders will only offer variable loan rates, while others may give you the option of both. At Evolution Money, all our secured loans come with variable interest rates.
Your financial situation: Depending on your financial circumstances, you may or may not be able to handle fluctuating payments based on interest rates. Consider if you will be able to afford increased repayments before taking out any variable-rate loan.
Interest rate projections: Current interest rate trends are always worth keeping an eye on. If interest rates are due to come down, a variable rate loan should help you to save on your repayments if they do. If interest rates are likely to rise, fixing at a lower rate could help you avoid paying more down the line.
Consider a secured loan from Evolution Money
If you’re a homeowner looking to borrow money, check your eligibility for a secured loan from Evolution Money today. We offer loans up to £100,000, with a variable interest rate and flexible repayment terms from three to 20 years.
Our customer reviews have given us an ‘Excellent’ rating on feefo and we are regulated by the Financial Conduct Authority. We’re also proud members of the Finance and Leasing Association so you can apply with confidence.
Feel free to check out more helpful guides and articles in our support hub.
Representative 22.93% APRC variable.
For a typical loan of £26,600 over 180 months with a variable interest rate of 19.56% per annum, your monthly repayments would be £484.00. This includes a Product Fee of £2,660.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £87,030.00. Annual Interest Rates range between 11.7% to 46.5% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
