Variable Rate 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.
19th April 2021
3 minute read
Perhaps you’re landscaping your garden or maybe you’d like to fit underfloor heating and super soft carpets to make your home more comfortable.
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 more clarity on how one variable loan stacks up against another, or how they differ from a fixed rate loan, read on for all the wisdom of variable rate loans.
What is a Variable Rate Loan?
A variable rate loan has an interest rate that can change over the loan period. This means that your monthly repayment amount could go up or down.
Whatever kind of loan you choose, you’ll agree the interest rate to pay when you sign your loan agreement and agree to the loan terms and conditions . 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.
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 straight away.
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
To give you an idea of how the Bank of England’s base rate 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 effect 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 lender extra security by using your home as collateral for a loan, it could help you secure a better rate. This is riskier though, as you could lose your home if you fail to make repayments.
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 lenders 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.
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 overpay 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 double-check things like redemption fees too, as they can affect the benefits of paying your loan off early.