Fixed vs Variable Finance Rates Explained

There are a multitude of industry terms and jargon within car finance that can send your head into a spin. With any finance package you will hear the terms ‘fixed’ and ‘variable’ rates mentioned, so when sourcing the most appropriate finance agreement for your next car, it is your Account Manager’s job to ensure you understand the benefits or risks that come with the various options that you may be eligible for, and each option will be discussed thoroughly to ensure that your finance proposal is most suitable to you and your circumstances.

Sourcing a finance agreement for your next car is a bit like a mortgage agreement for a house, that is why choosing to arrange your agreement through a broker is the same as using a mortgage broker to source the most suitable package for you. Most finance products are not just for brand new vehicles from a franchise dealership, but can be available for everything from preowned cars from a dealership, a vehicle purchased at a car auction, or even for a private sale. Here at Oracle Car Finance, we understand that picking the right car finance product might not always seem straight forward, therefore our experts are on hand to help you find the right product for your needs.

The Most Common Types Of Agreements

The most common types of finance agreements that most people will have heard of are a Hire Purchase or a Personal Contract Purchase.

With a Hire Purchase agreement or ‘HP’, once all of your monthly payments are made and the option to purchase fee has been settled, the vehicle is yours. Alternatively, you might consider a Personal Contract Purchase agreement or ‘PCP’. This type of agreement often reduces your monthly payments by giving you the option to settle any outstanding loan amounts in one final balloon payment. By deferring the guaranteed future value to the end of the agreement term you are effectively only paying for the amount the car is likely to depreciate over the term, meaning that the payments are often lower than if you were to opt for a HP. Once this agreement has come to the end, if you cannot afford to pay the final amount in one go, you can also speak to us about the option to refinancing the balloon payment within a new agreement.

Fixed Rate Loans Explained

On fixed rate loans, interest rates stay the same for entirety of the loan’s term and will therefore not change with fluctuation in the market, allowing the borrower to have standardised monthly payments. It is, of course, a popular choice for those who prefer the stability of their outgoings, knowing that a set amount is due each month and you can budget your other expenditures accordingly. You can then just continue to pay the same amount until the end of the agreement.

• Advantages
  – Easy to understand and simple: with a fixed rate agreement any deposit, monthly payment or charges are set out from the beginning so you know where you are with each payment
  – Predictable: You know exactly how much is coming out of your bank account each month
  – Long Term Reassurance: Rates may be on the way down at the moment but over the space of 2, 3 or 4 years a lot can change. You know your interest rate and payment will stay the same no matter what happens.
• Disadvantages
  – Paying Too Much: If rates drop quite considerably you are stuck paying the higher rate when perhaps you don’t need to. That is also where the ability to refinance comes in too, to help you reduce your costs rather than pay the higher amount until the end of the agreement.
  – Higher Initial Rates: A fix rate agreement will often start with a higher rate than a variable rate agreement, particularly when the rate is already a low figure.

Variable Rate Loans Explained

Essentially a variable rate loan means the monthly cost may fluctuate both up and down in line with the market. The variable rates are based on an index, such as the base rate set by the Bank of England which often influences the interest rates charged by other banks and lenders.

Most lenders will set their interest rates based on the base rate, then apply their own credit-based margins. If you have an excellent credit score, your interest rate may be lower, however a poor credit score will often result in a higher interest rate. Regardless of your score, remember that your interest rate may vary to reflect any changes to the base rate. So, if the base rate increases or decreases by 0.5%, the interest rate you pay is likely to change by the same amount.

• Advantages
  – Falling Rates: If the base rate falls during your agreement term so will the amount you pay each month. Obviously the same can be said the other way, but when the rates have recently been the highest they have been for many years, they are currently falling again.
  – Lower Initial Rate: A variable rate agreement often has a lower rate than a fixed rate from the very beginning, potentially making your payments already lower from the start of your agreement.
• Disadvantages
  – Difficult To Understand: Knowing exactly when your payment will fall or indeed rise can be difficult to understand.
  – Uncertainty: Not knowing how much you are paying each month can make budgeting tricky.
  – Risk: Whilst rates are dropping the appeal of a variable rate are easy to understand, however the future is difficult to predict. What is happening in the current market is unlikely to continue over the complete duration of your term so a few years down the line you may be hit by some unexpected price rises.

Which Type Is Most Suitable For Me?

The answer depends on a multitude of variances and also which option suits you and your circumstances more appropriately. Deciding on the best type of interest rate for you and your situation requires careful consideration, which our team of experts are more than happy to assist you with by explaining many of the advantages and disadvantages so that you can make an informed decision.

Variable rates may result in cheaper monthly payments from the beginning, but the risk is that they can change at any time and are affected by the market as a whole. Therefore, it is important to build enough margin into your budget to accommodate for any changes. However, many prefer to have the peace of mind of knowing the same amount is due each month, if this is something that seems more suitable then a fixed rate may be the better option.

Excellent, So What Now?

If you are ready to start discussing your next car then now is the time to look at what car finance options are available for you, regardless of if you have found the perfect vehicle yet or not. A call with your dedicated Account Manager is the best way to see your available options and to discuss your requirements for your finance package. Our team of dedicated Account Managers are always on hand to discuss these options alongside our range of finance products. To speak to an expert and get your free finance quotation, call us on 0800 012 6666 or complete our short online form.

With over 2,700 5-star reviews from our customers and having funded over £2billion and counting, Oracle Car Finance are the UK’s number 1 funder for prestige, sports and classic cars. Make sure you follow us on Instagram, LinkedIn and Facebook to keep up to date with what’s happening in the market and to see some stunning photos and videos of the amazing cars we fund.