When looking for secured loans, the rate is the one cost that most
people use to decide on the best deal for them. While the rate is an
important part of figuring out how much a loan will cost in the long
run, it's only one piece of the puzzle. Among those pieces is the type
of rate that your loan carries.
There are two major types of rates available in the UK - fixed and
variable rate. They are exactly what they sound like. A fixed rate is
one that stays the same over the life of your loan. If you take out a
five year loan with a fixed rate of 7%, you're guaranteed that rate will
remain at 7% for the full five years as long as you make the payments
as required. If you take out a five year loan with an variable rate, the interest rate that you pay will go up or down depending on some sort of index.
An variable rate may seem attractive at first glance. Many lenders
offer these with initial low rates in order to entice borrowers and
make loans more affordable. For the first year or two, an variable rate
may be as much as five percentage points lower than a similar loan with a
fixed rate. At the end of that initial period, though, the rate will be
adjusted to meet current market trends. If the interest rates have gone
up, you'll end up paying considerably more. If they've gone down, your
loan payments may drop. It's a risky gamble - and with most variable
options, the rate can be adjusted several times over the life of the
loan. Your loan repayment amount will fluctuate whenever the rate
changes.
By contrast, fixed rate loans may seem less attractive at first.
Because fixed rate loans offer a guaranteed loan rate, the quoted
interest rate is often higher than the loan rate quoted on variable
alternatives. However, that rate is guaranteed to remain the same for
the entire life of the loan, no matter what happens with secured loans rates in general. Your monthly payment is guaranteed to remain the same for the entire time that you will be repaying the loan.
Rachael Gallant has worked for the UK financial services
market for a number of years specialising in secured loan applications
for UK home owners. She understands how time consuming it can be trying
to interpret the associated jargon which is why she writes clear, easy
to understand guides exclusively for "Secured Loans Centre".
