Choosing between a fixed and variable rate loan affects how much you’ll pay each month—and how much uncertainty you’ll face.
Most UK personal loans are fixed rate, but understanding both options helps you make the right choice when variable rates are available (particularly for mortgages and some credit facilities).
This guide compares fixed and variable rate loans with UK examples, so you can decide which suits your situation.
What is a fixed-rate loan?
A fixed-rate loan charges the same interest rate for the entire loan term. Your monthly payment never changes, regardless of what happens to the Bank of England base rate.
How fixed rates work
When you take out a fixed-rate loan, the lender locks in your APR. Whether base rates rise or fall, your payment stays the same.
Example: £12,000 loan at 7.9% APR over 36 months
- Monthly payment: £376.89
- Total repaid: £13,568.04
- Total interest: £1,568.04
This payment won’t change for the full 36 months.
Fixed-rate pros
1. Predictable budgeting You know exactly what you’ll pay each month. No surprises, no recalculating your budget.
2. Protection from rate rises If the Bank of England raises rates, your loan isn’t affected. This was a huge advantage in 2022-2023 when rates jumped from 0.1% to 5.25%.
3. Peace of mind No need to monitor economic news or worry about payment increases.
Fixed-rate cons
1. No benefit from rate drops If rates fall, you’re still locked into your higher rate. You won’t benefit unless you refinance (which may involve fees).
2. Slightly higher initial rates Fixed rates are typically 0.5-1.5% higher than initial variable rates, as lenders price in the risk of future rate increases.
3. Early repayment charges Many fixed-rate loans charge penalties if you repay early or refinance—typically 1-5% of the outstanding balance.
What is a variable-rate loan?
A variable-rate loan has an interest rate that changes based on the Bank of England base rate or the lender’s discretion. Your monthly payment can increase or decrease over time.
How variable rates work
Variable rates are usually expressed as: Base rate + margin
Example: Base rate (5.25%) + margin (3.5%) = 8.75% APR
If the base rate rises to 5.75%, your APR becomes 9.25%. If it drops to 4.75%, your APR falls to 8.25%.
Your monthly payment adjusts accordingly.
Variable-rate pros
1. Lower initial rates Variable rates often start 0.5-1.5% lower than comparable fixed rates, meaning lower initial monthly payments.
2. Benefit from rate drops If the Bank of England cuts rates, your payments automatically decrease. You save money without refinancing.
3. Flexibility Variable-rate loans typically have no or lower early repayment charges, making it easier to overpay or refinance.
Variable-rate cons
1. Payment uncertainty Your monthly payment can rise unexpectedly, making budgeting harder.
2. Risk of rate increases If rates rise significantly (as they did in 2022-2023), your payments could become unaffordable.
3. Stress and complexity You need to monitor rate changes and adjust your budget accordingly. Not ideal if you prefer simplicity.
Fixed vs variable: real UK comparison
Let’s compare the same loan under both rate structures.
Loan: £20,000 over 48 months
Fixed rate at 7.9% APR
- Monthly payment: £488.27
- Total repaid: £23,437.28
- Total interest: £3,437.28
- Payment stays £488.27 for all 48 months
Variable rate starting at 6.9% APR
- Initial monthly payment: £478.52
- Total repaid: depends on rate changes
- Total interest: depends on rate changes
Scenario 1: Rates stay stable
If the variable rate stays at 6.9% for the full term:
- Total repaid: £22,969.20
- Total interest: £2,969.20
- Saving vs fixed: £468.08
Scenario 2: Rates rise after 12 months
If the variable rate rises to 8.9% at month 13:
- First 12 months at 6.9%: £478.52/month
- Remaining 36 months at 8.9%: £503.86/month
- Total repaid: £23,883.44
- Total interest: £3,883.44
- Cost vs fixed: £446.16 extra
Scenario 3: Rates fall after 12 months
If the variable rate drops to 4.9% at month 13:
- First 12 months at 6.9%: £478.52/month
- Remaining 36 months at 4.9%: £452.78/month
- Total repaid: £22,042.32
- Total interest: £2,042.32
- Saving vs fixed: £1,394.96
Variable rates offer both the best and worst outcomes. Fixed rates sit in the middle. Compare scenarios yourself with different rate changes.
Which should you choose?
Choose fixed rate if you:
- Value certainty and stable budgeting
- Can’t afford for payments to increase
- Think interest rates will rise (or stay high)
- Prefer simplicity and peace of mind
- Want to set up direct debit and forget about it
Best for: Most UK borrowers, especially those with tight budgets or low risk tolerance.
Choose variable rate if you:
- Can afford payment increases
- Think rates will fall soon
- Want to benefit from rate drops
- Plan to overpay aggressively or repay early
- Are comfortable monitoring rate changes
Best for: Borrowers with financial flexibility, those expecting rate cuts, or people planning to repay quickly.
What about tracker and discount rates?
Tracker rate
Directly follows the Bank of England base rate with a fixed margin.
Example: Base rate + 2.5%
- If base rate = 5%, your rate = 7.5%
- If base rate = 4%, your rate = 6.5%
Transparent and predictable (within variable rate terms). You always know your rate relative to the base rate.
Discount rate
The lender’s standard variable rate (SVR) minus a discount.
Example: SVR (9%) - 2% discount = 7%
Less transparent because the lender can change their SVR at any time, even if the base rate doesn’t move. Avoid these if possible—trackers are fairer.
When to refinance
From variable to fixed
Consider switching if:
- Rates have risen and you want to lock in before they go higher
- You can no longer afford payment volatility
- You’re losing sleep over potential rate increases
From fixed to variable (or a new fixed rate)
Consider switching if:
- Rates have fallen significantly since you took out your fixed loan
- Your fixed term is ending soon
- The savings outweigh any early repayment charges
Compare refinancing options to see if switching saves you money after fees.
Real-world advice
The Bank of England raised rates from 0.1% to 5.25% between late 2021 and mid-2023—one of the fastest tightening cycles in decades.
Borrowers with fixed-rate loans: Protected. Payments stayed the same.
Borrowers with variable-rate loans: Hit hard. Some saw payments increase by 30-50%.
Lesson: If you can’t afford a 2-3% rate increase, choose fixed rate. The extra peace of mind is worth the slightly higher initial cost.
On the flip side, variable-rate borrowers will benefit first if rates fall. Fixed-rate borrowers won’t see relief unless they refinance.
Put it into practice
Fixed rates offer stability; variable rates offer flexibility and potential savings. Choose based on your budget, risk tolerance, and rate expectations.
Before committing:
- Calculate both options with your loan details
- Model rate change scenarios to see worst and best cases
- Compare multiple lenders for the best terms
For more practical finance guides, explore our guides.
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Put This Into Practice
Use our free calculators to model your own scenarios