Category: Loans

When is it Best to Choose a Fixed Rate Loan?

There are many types of loan but some of the main differences between certain loans is the option of having a fixed rate versus a variable rate. A fixed rate means that the interest rate is held at a constant rate for a certain period of time. A variable rate will change whenever the lender chooses, usually in response to changes in the base rate set by the Bank of England but they can change them at any time. There are lots of reasons for choosing each type of loan, but there are some situations when a fixed rate loan could be the most sensible option for you.

If you will only just have enough money each month to manage your loan repayment then it can be a good idea to fix the rate so that you protect yourself against any possible increases. If you think that you will find money very difficult to manage, then protecting yourself against even a small rate change is a sensible idea. You will know exactly how much you will need to pay back each month and will have no nasty surprises, at least until the fixed rate period ends.

If you think interest rates are likely to rise, then it could be a good idea to fix your rate and hope that it will be a cheaper option than the variable rate. It is not easy to predict rate changes, but there are some things you could consider when trying to make this prediction. If the Bank of England base rate is very low and has been low for a while, you might think that rates would be more likely to go up than down. However, very recently this has not been the case and the rates were held at record low amounts for a long time and then put down even more. This shows how difficult it can be to predict this. You may also feel that certain situations politically, across the world or economically could have an influence on interest rates as well. Some people worry that leaving Europe could cause enough economic instability to mean that rates will rise a lot, but others feel the opposite. It can be difficult to predict and so it could also be worth looking at what economists are predicting. They are experts, but they will also be relying on guesswork as not only will they be having to predict the future, they will also be having to imagine what might be going on in the minds of those making the decision with regards to interest rate changes.

You also need to consider what will be best for you. Maybe the peace of mind of having a fixed rate will be worth it for you, regardless of what might be cheaper. You may worry every month when a debate takes pace to consider whether the rate should be changed and hope that you will not have to start suddenly finding more money to pay out towards your monthly loan repayment. With rates so low at the moment, even a small increase can actually make a big difference to the amount of interest you will be repaying in monetary terms.

It is worth noting that a fixed rate can be more expensive. Often when you take out the loan, the fixed rate is higher than the variable rate and unless the variable rate goes up significantly, it could work out dearer. However, as rates are so hard to predict it is hard to know until afterwards which will be the best value for money. This means that trying to work out whether it will save you money can be very hard. It could be worth asking a financial advisor what they think might happen and what they would do with regards to choosing between the different types of loans.

Decisions like this can be very tricky. However, you need to do your best to imagine how you might feel if you have each type of loan and which might be the best for you. Do lots of research and then you can be more confident in the decision that you make and know that even if you have made the wrong decision you have at least done everything that you can to inform yourself and make the best possible decision that you can.