Variable Rate Loans
Perhaps you’re landscaping your garden to create a sophisticated setting for evening soirees? Or maybe you’d like to fit underfloor heating and super soft carpets, so that you can wander bare feet through your home in comfort.
Whatever your reasons for considering a variable rate personal loan, it’s important to know the ins and outs of what you’re signing up for. If you’d like to have a clearer idea of how one variable loan stacks up against another, or how they differ from a fixed rate loan, sit back and let the fog clear with our guide to variable rate loans…
What is a Variable Rate Loan?
Whatever kind of loan you choose, you’ll agree the interest rate to pay when you start repayments as part of your loan contract. Interest is the cost for borrowing, which is added onto the original amount. With a variable rate loan, your starting rate of interest is agreed but it won’t necessarily be the rate you’ll pay for the lifetime of the loan. This means that the amount you pay back each month could change in the future, and in turn the total cost of the loan would alter too. Following so far?
So, how is the rate of a variable loan set in the first place and why might it change? The variable loan rates available will be steered by the market, along with the Bank of England base rate. Although a variable loan rate isn’t strictly tied to the Bank of England’s rate, if it increases then loan interest rates will almost certainly rise, though not necessarily instantly.
Variable rate personal loans: a summary
- Interest rate on the loan is variable
- Your repayments will vary over the payback term
- Your interest rate will vary according to market interest rates
At the moment, the Bank of England’s base rate is at a historic 300-year low of 0.25 per cent, though this could change at any time. Some smart financial types are saying this could be as early as next year – but there’s no way of knowing if it could be earlier or later. To give you an idea of how this might impact on you, just a 1% increase on a loan of £15,000 would raise the cost by £90.91 in just one year and have a huge impact on the total cost of the loan, which could increase even more if further rate rises happen.
The interest rates available to you personally will also depend on your personal circumstances, your credit report, how much you want to borrow and over how long. If you’re prepared to give a extra security by using your home as collateral for a secured loan, it could help you obtain a better rate. This is riskier because if you continually miss payments your creditor could look to take possession of your property and you could end up without anywhere to sleep at night, which is very much one of life’s essentials.
Compare Variable Rate Loans
If you don’t know what your interest rate will be for the length of your loan, how can you compare variable rate loan deals against one another?
You can compare starting rates, factor in loan arrangement fees and check out if there are any penalties for paying your loan off early or making overpayments. Use our MoneyMatcher to search for deals and we’ll highlight some of these things for you, along with showing the total loan cost based on the initial interest rate.
Check Interest Rates
As always, it’s important to remember that the headline interest rate advertised may not be the one offered to you if you’re accepted. That’s because must display a rate that’s available to 51% of those accepted. Taking a variable rate loan out over a longer period could reduce your monthly payments and even give you access to lower rates of interest. However, this will mean you will pay more money back over all.
A longer loan may also be subject to more rate fluctuation. And if there’s one key thing to remember with variable rate loans, it’s that you need to be able to manage the impact of rate fluctuation, should it occur. You really shouldn’t take out a variable rate loan if you can only just afford the repayments – a rate hike could lead your finances to spiral out of control like a badly flown magic carpet.
Fixed or Variable Rate Loan?
If you’d like a loan with the security of an interest rate that doesn’t change, a variable rate loan probably isn’t for you, particularly if you’re borrowing over a longer period.
On the opposite side of the lending fence, if you’d like to benefit from possible lower interest rates, have the flexibility of being able to make higher payments and can over pay so the debt is paid back sooner, a variable rate loan may suit you.
Secured or Unsecured Loan
If you do choose to go with a variable rate, ensure you’re clear as to whether your loan is secured or unsecured so you know whether your home or other assets could potentially be at risk. Don’t forget to doublecheck things like redemption fees too, they can put a real dampener on paying your loan off early.