Charlotte

When choosing a loan there are a lot of decisions to be made. You have to think about how much you need to borrow, how long to borrow it for, which lender to choose and which loan type. It can be a difficult thing to do, especially if you do not get help from a financial advisor. One of the decisions you may have to make is whether to pick a fixed rate loan or not and this can be quite crucial.

A fixed rate loan will give you an interest rate which will be guaranteed not to change for a certain period of time. This gives you some security as you will know exactly how much you will need to pay each month. You will be able to calculate if this is something that you can afford and when you sign up you will know exactly what to expect. This means that you will be protected from any increases in interest, which happen normally when the Bank of England increases the base rate, but lenders may also increase their rates at other times as well. This can give you peace of mind in knowing exactly how much you will be paying and that you will be well protected from increases.

However, there are disadvantages as well. A fixed rate is normally set at a higher level to the current variable rate offered by that lender. This means that if the variable rate stays the same for the term of the loan, you will actually have paid more than necessary. It also means that if the variable rate drops you will have paid even more. This can be annoying as well as expensive and as you are normally tied into a fixed rate loan, you will not be able to switch to one that is cheaper. If this is a five year fix on a mortgage and rates drop significantly in that time, you could end up having paid a lot more than those on a variable rate.

If only we could predict what the interest rates are likely to do, we would know whether it was better to fix and protect against an increase of stay variable and get a lower rate as the interest drops. In some ways you can look at the data and consider whether rates are likely to rise or fall. If they are very low, it would seem more likely they would go up, if they are very high it would seem more likely that they would fall. However, things do not always behave as expected and shock election results, business collapse or problems with banks are some examples of unexpected things that could cause a big change in a countries economy and mean that rates change in an unpredicted way. It is easier to predict in the short term than the long term, but even so, nothing is definite.

It can be wise to do a lot of research and to speak to a financial advisor about the pros and cons, particularly if the fixed rate period is quite long. You will need to understand fully what the consequences are of having a fixed rate so that you can decide whether it is the right thing for you. You do not want to have any regrets in either direction and if you are borrowing a lot of money, a few percent difference in interest could have a significant impact on the actual amount of costs you pay for the loan. It is also important to think about the effect it has on you personally. If you are likely to panic about rate increases and feel that you will not be able to afford bigger repayments, then the fixed rate option could help to keep you calm. However, if you are likely to feel regret if the rates down and you are locked in and cannot take advantage it may be better not to go with a fixed rate. It is a lot to think about.

Therefore it is up to you to look at the pros and cons of getting a fixed rate and think about which would suit you the most. If you could not cope with an increase in interest rates, then having a fixed rate will protect you against this. If you are willing to risk a rate rise in the hope that it will fall, then a variable one could be best. It is worth noting though that unless you have a tracker rate, there is no guarantee that a variable will fall even if the base rates do fall. It is a decision that should take a lot of thought and consideration and not be something you take on quickly. Imagine how you would feel if you were on a fixed rate and rates went up or down and alternatively how you would feel when rates changed if you were not on a fixed rate.

There are many people that get very worried about the idea of being in debt. They worry that if they get into debt it could lead to problems or they have a fear of knowing that the will owe money and have the constant stress of that. Other people have no fear at all of debt and will borrow as much money as they need to buy the things that they want. They feel that having things is more important than worrying about the cost of the debt. Most people will fall somewhere between the two extremes. It is important to have the right attitude towards debt though, so that you can use it to your advantage and not be taken advantage of by it.

There are lots of different types of debt and so it is not right to really classify it altogether. Borrowing money to pay for a home, is very different, for example, to borrowing the money to buy a pair of diamond earrings. Each borrowing decision needs to be made carefully and it is just as important to use the right type of debt as well as choosing whether it is right to borrow in the first place.

Whenever you choose to borrow money it is important to consider whether this is the right thing for you to do. If you consider every decision like this, even every credit card purchase, you will be more likely to make the right decisions and stay in control of your debt. It can be thought by some that every debt that is taken on with careful consideration can be considered to be good debt, but every hastily bit of borrowed money is bad debt. This is just one aspect to borrowing though, the reason for borrowing is also important. If you are borrowing to better yourself, perhaps to start a business, to go to university, to buy a home, then these could be considered good debt. This is because you should get more out than you pay in, so even though a mortgage will be expensive and it will take a long time to pay back. You will gain from an increase in value of the home and save money that you would have otherwise have paid out in rent. An education should help you to get a better paid job and a starting a business should also be a way to getting a better income and lifestyle.

Having a certain amount of concern for being in debt is a responsible thing to feel. Having a debt, whether good or bad is a big commitment. You owe that money and you will need to pay it back. Normally you have a repayment schedule and you will agree to pay back a certain amount each month. This means that you have a responsibility to make sure that you have that much money available each month to be able to pay back, as well as enough money to cover all of your other costs for the month. It is worth thinking about how you will manage that in the long term. You may be sure of being able to manage in the short term, but it is harder to know what your situation might be in the long term and whether you will be able to manage the payments or whether you need to consider not taking the loan. If you lose your job, become ill and unable to work, need to take time off to care for children or relatives then you will find that you have less income available to make the repayments. Also if your costs increase perhaps due to increased interest rates, fuel prices, food prices, a growing family etc then it is possible that you may struggle again. Therefore you need to consider whether you are happy to risk taking on debt even if these things may happen.

Having some concern is a good thing as it gives you an awareness of your responsibility. You know that you need to be able to make the repayments. However, getting too stressed about debt can hold you back. If you are worried about having debts hanging over you then it could stop you buying a home or furthering your education. These things can make a big difference to your life and your earning potential and so if you worry too much and decide not to borrow, you could find that you are holding yourself back. However, only you know how much of an impact the stress of debt will have on your life. You need to think about past experiences and how you may cope now and whether you think that it will have too much of a negative impact on you. If you have had problems with debt in the past you may worry that you will have them again and perhaps this might be justified, so you will need to be sensible.