Variable Interest Rate Explained

This variable interest rate guide is here to help you understand what is meant by the term and the advantages and disadvantages of this type of a finance package with a variable interest rate.

Creditplus definition of variable interest rate

Variable interest rates consist of two components - an index, and a credit-based margin which is determined by the lender. The credit-based margins will vary depending on an individual’s credit profile; the higher the credit score the lower the margins. Once determined, the credit-based margins will not change until the loan is paid off in full.

The index rate however will fluctuate over the period of the loan in accordance with the economy.

For example: If an individual took out a variable loan agreement with a credit-based margin of 6% and the rate of interest at which banks offer to loan money to one another was at 3.24% at the time the loan was agreed, then the variable rate would be 9.24%. However, if the rate of interest at which banks loan money to each other dropped to 3.12% your variable rate would drop to 9.12% to reflect these changes.

The benefits of a variable interest rate loan

  • Variable interest rates can be found to be lower than fixed rates
  • The amount of your repayments is dependent on the economy which means they could rise or fall as the prime rate changes

The disadvantages of a variable interest rate loan

  • The interest rate can rise over time
  • If the rate rises too high, you may no longer be able to meet the monthly payments

Which type of interest rate is right for me?

Deciding upon the best type of interest rate for you is a key part of the car finance process. You will need to take into account a number of factors when you decide upon the right deal for you. Whilst our Customer Advisors are here to provide you with guidance through the process, it is up to you to make a decision.

So what should you bear in mind? Variable interest rates can change over time, so are there any potential changes on the horizon in your life? Are you looking to change job, get married or start a family? You have to consider any changes that could change the amount of money you have available for your repayments. Variable rates are a great option as they are generally lower than fixed rates. It is up to you if you want the certainty of a fixed rate instead. 

Got a question for us?

If you require further assistance, our team of Customer Advisors are here to help. We're open six days a week - you can view our opening hours here - and we're more than happy to answer your questions.