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Fixed Rate vs Variable Rate Loans

03/11/2016

Choosing a fixed or a variable rate loan can be complex, but understanding the differences between the two can be quite straightforward. Making sure you have a full grasp of the consequences of the two is vital to obtaining a loan that suits your needs.

Fixed Rate Loans

Fixed rate loans are those in which the interest rate remains the same throughout the entirety of the loan. While this can be of huge advantage in some circumstances, it can also end up being an unnecessarily costly option in other circumstances.

Advantages of a Fixed Rate Loan

The first advantage is that the loan is easily understood and costs can be factored in for the entire duration of the loan. This can provide some peace of mind. Should the loan be taken out when interest rates are low, this can end up enormously advantageous, occasionally even for long term loans where fluctuating interest rates can have an enormous effect on repayments.

fixed v variable rates

The simplicity of a fixed rate loan can also be an advantage. This ease of understanding can lead to confident financial planning and make it less likely the borrower will be hit with unforeseen costs.

Disadvantages of a Fixed Rate Loan

Predictability in regards to fixed rate loans is often a false comfort.

Fixed rate loans are typically less customisable as well, meaning that individual circumstances are less likely to be taken into consideration when the loan is taken out.

Despite the disadvantages associated with a fixed rate loan, they are sought after for reasons previously explained. This is particularly the case when interest rates are set at a low level, which can make the loan harder to obtain for smaller businesses.

Fixed rate loans can also involve highly expensive breakage clauses that should be fully understood before signing a contract.

Variable Rate Loans

Variable rate loans are those whose interest rates adjust according to those set nationally. This means the rate can fluctuate significantly, particularly over the course of a long-term loan.

Consider building your business with a business loan

Advantages of a Variable Rate Loan

Variable rate loans can be the easiest type of loan to obtain in many circumstances. This can make them a far more suitable loan choice for small businesses and short term loans.

While the peace of mind of a fixed rate loan can be tempting, over the longer term, variable rate loans can be much more cost efficient as interest rates tend to drop or even out, although not significantly, over the course of these types of loans.

Another advantage of the variable rate loan is it can be adjusted to the needs of the borrower. This level of flexibility can be crucial to some and is one of the reasons why larger companies may typically seek out a variable rate loan as a matter of course.

Disadvantages of a Variable Rate Loan

The first and most obvious disadvantage to the variable rate loan is there are no guarantees to what the repayments will amount to. This can lead to large repayments in comparison should interest surge during the period of the loan, particularly regarding short term lending.

For some, variable rate loans can also appear enormously complex if you are not well-versed in the finer points of interest rates and the inner workings of funding. As variable rate loans are, by their very nature, unpredictable, this in turn can lead to over cautious planning or, even worse, overspending that leads to problems managing repayments.

Suitability and Requirements

In general, fixed rate loans are best suited to short term lending if the interest rate is low, while variable rate loans tend to work out over the longer term for larger value loans.

As previously mentioned, long term funding and high value loans will usually incur lower interest rates over the course of the loan. This, as well as a higher risk to the lender, makes the variable rate loan potentially better suited, although not exclusively, to well-established businesses and those with high annual turnovers.

Costs of loans can typically be related to the risk incurred by the lender, therefore SME (Small To Medium Sized Enterprises) without a well-established income will usually be required to “secure” the loan by putting forward assets, most often property, as security. Whenever assets are required to access funding, the full consequences of non-payment will need to be fully understood as this can lead to you losing your home.

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Providers

There are many banks and financial entities that provide funding in the form of fixed and variable rate loans, so it is imperative that each are fully researched to make sure you are dealing with a reputable funder who can offer you a loan to suit your needs. We believe some of the most renowned include:

  • Everline
  • Capify
  • Ashley Business Cash Ltd

Everline

A new entity in the world of business funding, Everline launched in 2012 with the remit to offer small businesses finances of up to £120,000. Everline has grown enormously over the last few years to the point where they are now one of the best UK online business loan providers.

Capify

A global funding provider, Capify were founded in 2008 and have since grown to become one of the most renowned funding providers from regions including North America and Europe. Capify clients can access up to 75% of the company’s average turnover within days of application and up to £500,000 at a time, making them one of the largest value loan providers in the UK.

Ashley Business Cash Ltd

A subsidiary of Ashley Finance, Ashley Business Cash Ltd was founded in 2011. Funds of up to £100,000 can be accessed for loan terms of up to 24 months, with the loan easily customised to suit the needs of their clients, making them one of the most flexible and easy to understand loan providers in the UK.

Expert Market is a trading name of Marketing VF Limited, which is an appointed representative of Resolution Compliance Limited (FRN: 574048) ) which is authorised and regulated by the Financial Conduct Authority. Marketing VF Limited is registered in England and Wales. Company number: 06951544. Registered office: Imperial Works, Block C, Perren Street, London, NW5 3ED, United Kingdom.