Consolidate expensive debt to reduce interest, lower payments & stop late fees

Access the money tied in your home to get great consolidation loan rate from leading UK lenders

Debt consolidation loans – fixed vs. variable rates

If you are considering taking out a debt consolidation loan, one of the main decisions you will have to make is whether you take out a fixed rate or a variable rate loan.

Fixed rates have traditionally been the preferred product over the last few years. However, many people have benefited from low variable rates since the Bank of England Base rate fell to its record low of 0.5 per cent in March 2009.

If you are thinking about taking out a debt consolidation loan, here are the advantages and disadvantages of both types of deal.

Advantages and disadvantages of fixed rates

A fixed rate debt consolidation loan will guarantee your loan repayments at a certain interest rate. This means that you will know exactly what you are going to pay for a specified period.

Irrespective of what happens to the economy or the Bank of England Base rate, a fixed rate means that you will always have the security of knowing exactly what you will pay. Even if general interest rates rise significantly, your rate and your payment will remain fixed. You therefore have the peace of mind of being able to budget and to manage your household finances around your debt consolidation loan payments.

If you took out a £25,000 debt consolidation loan at a fixed interest rate of 8 per cent, you would pay £166.67 per month on an ‘interest only’ basis. If interest rates went up to 12 per cent, you would continue to pay £166.67 per month, rather than someone on a variable rate that would pay £250 for the same ‘interest only’ loan at 12 per cent.

Conversely, one of the main disadvantages of a fixed rate debt consolidation loan is that you won’t benefit if interest rates were to fall. If loan rates were to come down, you would continue to pay the fixed rate you signed up for.

The other main disadvantage of a fixed rate debt consolidation loan is that they can often be more expensive than variable rate loans. Generally speaking, you will find that you pay a premium for the security of a guaranteed rate and so your initial repayments may be more expensive than a variable rate deal. As mortgage expert Simon Tyler told the BBC: “Ultimately a fixed rate mortgage is an insurance policy, and you may well be paying more for the product today.”

Finally, a fixed rate debt consolidation loan may have ‘early repayment charges’ if you want to pay the loan back early. Penalties for early repayment of a fixed rate loan can be significant and so a variable rate loan may be more flexible.

Advantages and disadvantages of variable rates

Variable rate debt consolidation loans are generally linked to either a lender’s ‘standard variable rate’ or to the Bank of England Base rate. This means that when interest rates go up and down, your interest rate and your monthly repayments will rise and fall accordingly.

A variable rate debt consolidation loan will often be cheaper than a fixed rate when interest rates are low or when they are falling. If rates are coming down then a variable rate loan means that you will generally benefit from falling interest rates.

In addition, variable rate debt consolidation loans are often cheaper than the fixed rate equivalent. This means that your initial repayment will be lower, saving you money.

However, the main disadvantage of taking a variable rate debt consolidation loan is that your repayments could go up if underlying interest rates were to rise. A 1 per cent rise in interest rates results in an increase of £8.33 to every £10,000 of variable rate debt consolidation loan that you have (assuming an ‘interest only’ loan). If you have a large debt consolidation loan on a variable rate, your monthly repayments could increase significantly if interest rates were to rise.

Share/link this page, so more people become better at managing their debt. Also if you need a secured debt consolidation loan, fill this form.