Fixed rate loans vs variable rate loans: what’s the difference?
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Secured loans may feel confusing at first. You might come across terms like interest rates, APR and base rates without knowing what they mean.
In this guide, we’ll keep things simple. We’ll explain:
- What loan rates are
- What is a fixed rate loan
- What is a variable rate loan
- The pros and cons of each
- How to choose between them
By the end, you’ll hopefully have a clearer idea of which option might suit you.
Need further information on loans and how they work? Take a look at our Help & Advice section.
What are loan rates?
A loan rate is the interest you pay to borrow money. When you take out a loan, you repay the amount you borrowed, plus interest on top.
This interest is usually shown as an APR (Annual Percentage Rate) or APRC (Annual Percentage Rate of Charge). The latter is more commonly used for secured homeowner loans and mortgages.
Loan rates vary depending on:
- The lender
- The type of loan
- Your credit history
- The wider economy
Some loan rates stay the same. Others can change over time. This is where fixed and variable rate loans come in.
What is a fixed rate loan?
A fixed rate loan is a loan where the interest rate stays the same for the full loan term or a set number of years. It is set at the start and does not change during the agreed period.
During the fixed period with a fixed rate loan:
- Your interest rate stays the same
- Your monthly repayments stay the same
- You always know what you’ll pay
This may make it easier for you to plan your finances for that fixed time.
Advantages of a fixed rate loan
- Predictable monthly payments: Your repayments stay the same every month. This may make it easier to budget your money and plan your finances long term.
- Protection from rising interest rates: If interest rates go up, yours will not change. You are protected from increases as long as you remain on a fixed rate.
- Simple and easy to manage: There are no surprises with a fixed rate loan. Some people like the peace of mind this brings.
Disadvantages of a fixed rate loan
- Higher starting rates: Fixed rates are sometimes higher than variable rates at the start.
- No benefit if rates fall: If interest rates drop, your rate will stay the same. This may mean you’re left paying a higher interest rate than is standard for the current market.
- You could pay more overall: If the market rates fall significantly, you may end up paying more than with a variable loan.
- Exit fees: You usually won’t be able to leave a fixed rate agreement early without incurring early repayment charges.
What is a variable rate loan?
A variable rate loan is a loan where the interest rate can change over time. This means your monthly repayments can go up or down.
Most variable rates are linked to the Bank of England base rate. This can change in line with wider economic conditions and has a knock-on effect on all other interest rates.
If the base rate changes:
- Your interest rate may change
- Your monthly payments may change
The lender will explain how and when this can happen in your agreement.
Advantages of a variable rate loan
- Potential for lower starting rates: Variable rate loans sometimes start with lower interest rates than fixed options. This could make your initial monthly repayments more affordable.
- Potential savings if rates fall: If interest rates go down, your repayments could become cheaper. This may put money back in your pocket or allow you to repay the loan earlier than expected (if the lender allows).
- More flexibility: Some variable loans allow overpayments or early repayments with fewer restrictions. This does depend on the lender though, and charges may still apply.
Disadvantages of a variable rate loan
- Unpredictable payments: Your monthly repayments can change. This may make budgeting or planning for the future more difficult.
- Risk of rising costs: 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.
Fixed rate loan vs variable rate loan: How to choose
Ultimately, one isn’t necessarily better than the other. The right option depends on your situation.
Here are some key things to think about:
- Your attitude to risk: If you prefer certainty, a fixed rate loan could be ideal. If you’re comfortable with changes, a variable loan may help you save in the long run.
- Your financial situation: Consider whether you’ll be able to afford repayments if rates increase. If so, a variable rate loan could work for you. If you’re not sure, it might be sensible to choose a fixed rate loan.
- Fees and loan terms: Check for extra costs like arrangement or early repayment fees. It’s also worth thinking about the length of the loan. Longer terms could mean lower monthly payments, but more interest overall.
Some lenders will only offer variable loan rates, while others may give you the option to choose. At Evolution Money, all our secured loans come with variable interest rates.
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 £105,000, with variable interest rates and flexible repayment terms from 3 to 20 years.
Our customer reviews have given us an ‘Excellent’ rating on Feefo and we are proud members of the Finance and Leasing Association, so you can apply with confidence.
All loans are subject to status and eligibility. Available to UK homeowners aged 21 to 70. Terms and conditions apply. Not all applicants will be accepted.
Don’t rush into securing a loan against your home. Falling behind on repayments may put your property at risk of repossession.
Is a fixed rate loan better than a variable rate loan?
Neither is ‘better’ than the other. It depends entirely on your financial situation and needs. Fixed rate loans offer stability, while variable rate loans offer flexibility. You could potentially save with a variable rate loan, but this is not always the case.
Can my variable rate loan increase a lot?
Yes, variable rate loans could increase if interest rates rise. That’s why it’s important to check if you can afford higher payments before applying.
Do fixed rate loans ever change?
Not during the fixed period. However, once that period ends, your loan may move to a different rate. This depends on the agreement.
Can I switch from variable to fixed rate?
Some lenders may let you switch from a variable rate to a fixed rate. However, it depends on the terms of your loan and whether the lender offers fixed rates. There may also be fees involved.
Which loan type is cheaper?
This depends on interest rate changes over time. Variable loans may be cheaper if rates fall. However, they could also be more expensive if rates rise. This is why it’s a good idea to check the total cost and what you can afford before choosing a loan.
Representative 17.46% APRC (Variable)
For a typical loan of £23,120 over 120 months with a variable interest rate of 17.46% per annum, your monthly repayments would be £442.07. This includes a Product Fee of £2,312.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £53,047.80. Annual Interest Rates range between 8.6% to 27.87% (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. 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.
