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Interest Rates

Is a Fixed Rate Loan the Best Way to Protect Against Interest Rate Rises?

Interest rates can be unpredictable and if you have a loan then you may worry that increases in interest rates could make it difficult or even impossible for you to make the repayments. If you take out a fixed rate loan, then the interest rate cannot change which means that you are protected against these interest rate rises and therefore do not need to worry about the loan costs rising. However, there are other factors that you need to consider before you automatically opt for this.

Fixed rate loans could be dearer
A fixed rate loan rate is usually set higher than the current interest rate. This means that if the rates then do rise, the lender will not miss out on the extra interest they would have gained had you been on a variable rate. If rates do rise considerably then you could find that it was worth paying that extra high interest at the beginning of the loan period as you will end up paying less in the long term. However, rates may not rise and you may end up paying more. It is hard to predict what may happen though. It is fair to say though that a lender will want to give themselves the best possible chance of profiting form you and so if they felt that rates were likely to rise a lot, they would set their fixed rates in order to counter the costs of that.

Rates may fall
There is always a chance that interest rates may fall. If you are on a fixed rate deal then you will not be able to take advantage of these falls in interest rates. Some lenders may not pass these reductions onto borrowers anyway but if it falls significantly then you may miss out. This has happened before when rates suddenly fell to record lows and quickly and those tied into to fixed rate deals found themselves paying much more in interest than many other people. However, if the rates are already very low, then they will not be able to fall that much and so in this situation you could find that you will not miss out as variable rates will not go down.

Fixed rate period may run out
Some loans have a limited fixed rate period. This means that it will only last for a short time and then you will move back onto the standard variable rate. This will depend on the lender and the type of loan and so you will need to make sure that you check this. It may be that once you go onto the variable rate you will be able to look around for a new loan deal and move to someone more competitive as it is likely that the variable rate that you move to will not be competitive; although you will have to check this to be sure. You may also find that you may be tied into that lender once the fixed rate period ends and will not be bale to move or will have to pay a fee to be able to do so. Check this when you take out the loan so that you can make a decision based on this.

Consistent payments
It may be that you like the idea that you can have a loan and always repay the same each month. When interest rates fluctuate it means that you have to pay a different amount each month. This is fine if you are paying less as that is easy to manage and can be helpful but if the rates go up and you have to find more money then it can be difficult. This is particularly hard if you are only just managing to cover your costs and so cannot afford to have any of them going up; even if it is just a bit.

So as you can see, there are advantages and disadvantages to getting a fixed price loan and so it is worth thinking hard about whether it is the right thing for you. There are other options as well which could help to protect you against rate changes which you should consider. For example, if you save some money each month then you will be able to use this to help you if you have to pay more interest each month. Also, if you take a loan for a very short term there is less risk of the interest rates going up. If you borrow nothing at all then you will not have to worry about the cost of interest rising. You can also reduce spending at times when interest rates rise so that you can afford the repayments.

It is worth considering where you are with your finances and how much you can stretch your budget as this will enable you to calculate how much risk you can take on with regards to the chances of rising interest rates. If you have savings and can manage the repayments easily, then you may not need to worry so much, but if you are struggling with repayments and have no savings then things could be more difficult for you if your interest goes up.

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