Fixed Interest Rate Explained

A fixed interest rate is one that does not change in size across the term of an agreement. Should you choose an agreement with a fixed interest rate, you will be able to calculate the exact cost of the entire car finance agreement from the start.

Creditplus Definition of Fixed Interest Rate

The term fixed interest rate is used to describe any interest rates that do not fluctuate over time. Instead, they stay at the set rate for the entire duration of the finance agreement. The key benefit of this type of interest rate is that you know exactly how much you will be paying across the agreement.

In normal circumstances, lenders base their interest rates on the Bank of England’s base rates, where the lenders borrow their money from. This means that changes in the economy and financial market can lead to interest rates changing to match what’s going on in the UK as a whole. When lenders determine what a fixed interest rate will be, it is done based on the market rates available at the time of setting.

Benefits of a fixed interest loan

  • You know exactly what you are paying each month
  • It's an extremely stable and safe way of repaying a loan without leaving the customer vulnerable if the interest rates were to change in relation to the Bank of England's base rate
  • Fixing your interest rate can also result in a better overall repayment across the term of the loan, compared with a variable rate which could significantly change during the term.

Disadvantages of a fixed interest loan

  •  If the market drops and interest rates fall, you will be left paying a higher rate than others
  •  It can be more difficult to get a loan at a favourable rate as the lender takes a risk on the rate not changing above the set rate

What other types of interest rate are there?

Alongside the fixed interest rate, there is the variable rate. It works as the opposite to the fixed rate, as it can change over the period of the car finance agreement. Generally, variable interest rate loans have a lower monthly payment then fixed interest rate loans, but there is always the risk that the interest rates could become too high for you to meet the monthly payments.

Here at Creditplus, our Customer Advisors will discuss your finance options with you and work with our lenders to ensure you get the finance package that is right for your personal and financial circumstances.

Wikipedia Definition of Fixed Interest Rate

"A Fixed Interest Rate loan is where the interest rate doesn't fluctuate during the fixed rate period of the loan.[1] This allows the borrower to accurately predict their future payments. Variable rate loans, by contrast, are anchored to the prevailing discount rate.

A fixed interest rate is based on the lender's assumptions about the average discount rate over the fixed rate period."

Source: Fixed interest rate loan

Related Terms

Flat Rate
Variable Rate

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