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.
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.