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How can interest rate changes affect you?

Dramatically, if you have a variable rate loan. Most homeowner loans and also many unsecured loans have what is known as a variable APR. APR stands for Annual Percentage Rate and is a measure of how much interest you have to pay on your loan each year. The bad news is that it can go up. And if you've a 20 year loan for '25,000 an increase of just 0.5% will cost you over '1700.

You see, lenders are careful to avoid losing money on their loans and if their APR is lower than the Bank of England rate, the amount you owe on your personal loan is actually decreasing. A variable rate loan will never let that happen, making sure that the rate is always a few percent higher than the Bank of England base rate.
My loan rate just increased. What should I do?

The first rule is not to panic. You aren't losing a fortune every day, so you needn't jump to the nearest option, but you do need to do something soon.

First you should look to see if you can find a history of the loan rates with your lender. Some lender's rates fluctuate more than others, so this might not be immediately dangerous - have a look to see whether the rate has changed in the past and, more importantly, whether it decreased again.

Unfortunately, you'll probably find that your loan repayments with your current lender are going up for good, in which case you need to start shopping around. As Anna Bowes, an Independent Financial Adviser at Chase de Vere said:

Do not let inertia get the better of you. Your bank or building society is not going to reward you with loyalty.

Try to calculate exactly how much a change of lender might save - or cost - you. If you search for the best loan for you with our comparison service, you should be able to find the best rate for you and see how much you could save.

Once you've checked for the saving, you need to keep an eye out for hidden costs. Most personal loans (especially variable rate ones!) charge you an extra month's interest or some fee for paying out early, so you'll need to subtract that from your running total. If your change in payments is still worth it, it's time to switch!
How can I prevent myself from getting burnt?

The safest, although possibly not the cheapest, option is to plump for a fixed rate loan in the first place. In which case, your loan repayments will never change and this article doesn't apply to you!

If you haven't done that, you've noticed that variable rate loans can be cheaper, although more dangerous. Also a fixed rate loan might not be a viable option if you don't have a perfect credit rating. The first trick is to overpay if possible - if you don't need some surplus money, then get use it to get rid of some of that loan hanging over you - it'll always be cheaper now than in the future. Paying more than your standard loan repayment means that you'll pay less interest in total and you'll be free of your debt sooner.

Another good idea is to budget a higher rate loan than you actually take out. If you can absorb repayments 2% higher than you actually have to, then a rate increase won't be an utter disaster - and you'll have a more comfortable position looking for a replacement loan.

A final thing to consider is that a lower APR does not necessarily mean a less expensive loan. There are extra costs associated with loans from many lenders, such as arrangement fees or early payment charges. So remember - a variable rate loan might be less expensive, but be vigilant!