Fixed Rate Personal Loans
Written by Robert Bester, Consumer Finance Expert Robert has been a writer for six years, specialising in consumer finance and the UK lending market. Concentrating on consumer credit products, Robert writes informative articles that help customers manage their personal finances efficiently.
11th January 2021
3 minute read
Whether you want to splash out on a fabulous holiday or you need to renovate an area of your home a personal loan could help you achieve your goals.
To stay on top of repayments and always know how much you’ll be expected to part with every month, a fixed rate personal loan could be the choice for you.
Here are the key things you need to consider…
What is a Fixed Rate Personal Loan?
With a fixed rate personal loan, you pay the same rate of interest for the length of the loan. The rate of interest you pay on the sum you borrow is set by the lender and determined by the market.
Fixed rate personal loans: a summary
- Interest rate on the loan is fixed
- Your repayments stay the same for the full term
- Your interest rate is unaffected by market interest rates
To get the most attractive rates of borrowing you’ll need to have a good credit rating. Whatever rate your loan is set at, you can be confident your lender won’t suddenly bump up your repayments because of an interest rate rise. This means that your borrowing can be budgeted for more easily.
Compare Fixed Rate Loans
When you’re comparing interest rates for a fixed rate loan, remember that not everyone gets the representative rate advertised. The rules state that 51% of customers accepted for the product must get that rate, so you could be offered a higher rate of interest if your application is successful.
The length of the loan is also important because borrowing for a longer period means that you’ll have more interest to pay back and the loan will cost you more in total. In short, the aim is to borrow an amount you can afford to pay back and repay it in the least possible length of time without putting too much pressure on your finances.
Interest Rates & Arrangement Fees
Generally speaking, lower interest rates tend to be available when borrowing larger amounts but you shouldn’t let this lure you into borrowing more than you need. Checking deals either side of a tipping point is wise though, as this could help you unearth a better rate. Say you need £4,900 for your purchase, you should also look at loan offers for £5,000 as you may find you’re able to snag a slightly lower interest rate and therefore pay less back overall.
Arrangement fees, charged by some providers for setting up a loan can also add to the total cost of borrowing. When you use our moneymatcher to view matches tailored to your requirements, it includes these in the total cost. Plus there’s a ‘more info’ tab to highlight things to look out for, as well as important criteria that you must meet to apply for particular loans.
Some loans start off with a fixed rate before moving onto a variable rate.The starting interest rates on these deals will likely be a little lower and those first few payments will be more affordable as a result. However, you need to be mindful that the total cost of your loan will bump up once you move onto the variable rate. It could also become more difficult to budget for your payments if the loan provider decides to alter the variable rate in the future.
The Difference Between a Fixed and Variable Rate Loan
Whether you choose a fixed or variable rate loan, the interest rate you pay at the start of your repayments is determined at the time your loan is given the go ahead. That doesn’t mean that these kinds of deals can be compared side by side though. A fixed rate loan offers payment security because you know your rate will stay the same until your loan is paid off.
The main differences between fixed and variable rate loans are summarized in the table below:
Fixed Rate Loan
- Interest rates won’t change
- Payments remain the same
Variable Rate Loan
- Interest rates can go up and down
- Payments can go up and down depending on interest rates
With a variable rate loan, your interest rate and therefore your payments may not remain static. They could increase or decrease at any time, which is great news if they go down, not so much if they go up. When interest rates are low, a variable loan could be an attractive option compared to a fixed deal but you’ll have to be prepared to handle the consequences if rates move in the other direction.
Overpayment to reduce the monthly cost or duration of the loan is usually an option on either loan type. Your lender may charge early redemption fees, which is something you need to check before you sign the dotted line, particularly if you’re planning to make extra payments when you can afford to do so.
Ready to check out the Money Guru’s powers of comparison? Head over to the moneymatcher for your very own tailored comparison table.