Are personal loans fixed or variable?

Different types of loans can be either fixed rate or variable rate, depending on the lender and the product you choose. Novuna Personal Finance loans are always fixed rate. In fact, most personal loans are fixed rate, where the interest rate remains the same for the duration of your loan. This helps borrowers to manage their outgoings more effectively, as they’ll always repay the same amount each month.

In this guide, we’ll cover the differences between fixed and variable rates to help you decide what option might be most suitable for you and your finances.

How do fixed interest rate products work?

With fixed rate finance products, such as most personal loans, the interest rate you’re offered will remain constant for the duration of your term. Your monthly repayments will therefore stay the same each month, too.

Pros and cons of fixed interest rates

Pros of fixed interest rates

  • Predictable monthly repayments

Your lender will offer you a specific interest rate when you take out a financial product, and this rate will remain unchanged – regardless of what’s going on with market interest rates.

As the interest rate won’t change, your monthly payments will remain consistent. This is beneficial for you if you like to know exactly how much you need to repay each month, potentially helping you to manage your money.

  • Suitable for long-term planning

If you like planning ahead, fixed rates are likely to be the best option for you. Borrowing over a long period of time can be a big financial decision, but some of this stress can be offset if you can rely on consistent, fixed rate monthly payments.

  • Transparency on total interest paid

Another advantage is you can more easily calculate how much interest you’ll pay in total, because you’ll know from the get-go what interest rate you’ll be charged for the duration of your term.

You could even use a fixed rate calculator to work out how much your monthly repayments might be and the total amount repayable, based on the lender’s advertised rate.

  • Easier to compare products

Fixed rate products can be easier to compare across different lenders, as there’s greater certainty over the interest rates being offered.

Cons of fixed interest rates

  • Higher initial interest rates

One potential disadvantage of fixed rate interest is that you may be charged a slightly higher initial interest rate compared to alternative variable rate products.

If market rates change and interest rates go down, you may find yourself paying more interest in total compared to a variable rate product. However, if market interest rates increase you may save money as this won’t impact your fixed rate interest cost.

  • Less flexibility

You might feel locked into a fixed rate product if interest rates subsequently drop, and you aren’t able to take advantage of the best deals. This is a risk but, for many, it’s worth it to ‘lock in’ a fixed interest rate and enjoy the stability fixed-rate payments provide.

  • Early repayment

Some lenders may allow you to make early repayments without incurring any charges, others may charge you for making extra payments or settling early. This can be particularly expensive if you have borrowed a large sum.

You should always review the terms and conditions of any agreement to make sure you’re fully aware of any potential penalty charges.

How do variable rates work?

With a variable rate product, the interest rate will fluctuate based on changes in the market and economic conditions. Lenders will likely increase or decrease their interest rates in line with changes to the Bank of England’s base rate (plus the lender’s own costs).

This means your monthly repayments could go up or down too which could make it more difficult to manage your outgoings as you won’t be able to predict your monthly repayment amount.

You’ll most commonly see ‘variable rate’ refer to mortgage products, where the interest rate of a mortgage fluctuates over time.

Pros and cons of variable interest rates

Pros of variable interest rates

  • Opens up your options

Different finance products are most suitable for different types of people, and so variable rate products may offer a great solution for certain individuals. A variable interest rate can sometimes be seen as a bit of a gamble. If interest rates rise, you’ll pay a higher amount. However, if interest rates decrease – so will your monthly repayments.

Variable rate products could be a cost-effective option, but they’re not for the faint-hearted. If you believe you can manage fluctuations in your monthly repayment figure, and your finances can withstand potential increases, variable rates could be suitable for you.

  • Potential for lower interest costs over time

If market interest rates remain stable – or even start to decrease – you may benefit from lower total interest costs compared to a fixed option. You may have the option to make extra payments, helping you to pay down the principal amount faster which may reduce the overall cost of borrowing.

Cons of variable interest rates

  • Potentially higher interest rates

If interest rates rise, this could lead to higher monthly repayment. You might also end up paying more interest in total compared to a fixed-rate option.

  • Trickier to manage your outgoings

As you won’t know exactly how much you need to repay every month, borrowers might find it harder to manage their outgoings. Substantial interest rate rises could cause financial stress to borrowers who are not expecting such an increase to their monthly repayment amount.

  • Makes long-term planning more challenging

If you value stability in your finances, a variable rate product might not be the right option for you. The fluctuating interest rates can make long-term planning difficult as you won’t know exactly how much your repayments will be in the future.

Conclusion: should I choose a variable or fixed interest rate?

There’s no right or wrong answer when it comes to choosing a variable or fixed interest rate.

The most suitable option for you will depend on the product you choose, the terms offered, your financial situation, risk tolerance and how much you expect interest rates to fluctuate throughout the duration of your term. Do your research not only on lenders and their terms, but also on the financial market in general to ensure you’re making an informed choice.

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Written by

Sophie Venner

Sophie Venner is a Yorkshire-based content writer specialising in crafting content for the financial services industry. She’s written over 300 articles on finance, but she’s covered everything from insurance to digital marketing trends. Her content has been featured in the likes of Semrush, Digital Marketing Magazine and Insurance Business. In her spare time, you won’t find Sophie far from a notepad and pen as she squirrels away trying to write a novel.

Friday 27th October 2023