Is car loan interest rate fixed or floating?

Roman Danaev22 December 2025

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In the UK, car loan interest rates are usually fixed rather than floating, especially when the borrowing is arranged through Hire Purchase or Personal Contract Purchase. These products are built around predictable monthly instalments, so lenders use fixed pricing that stays the same from the moment you sign until the agreement ends. This structure gives drivers stable repayments and protection from sudden increases during the loan term.

Car loan interest rate explained

A car loan interest rate sets the cost of borrowing and shapes every repayment you’ll make, so understanding how it works helps you judge whether a deal suits your budget.

Fixed interest rate

A fixed interest rate keeps your monthly instalments steady from the start of the agreement to the final payment. Because the rate does not react to base-rate changes, your overall cost remains predictable and easier to plan around. This is the structure used in the vast majority of HP and PCP agreements, and it is the format many lenders prefer because it reduces the risk of payment shocks for both sides.

Floating rates

Floating or variable rates behave differently. The amount you pay can rise or fall depending on movements in the base rate or another benchmark chosen by the lender. When market rates fall, the loan becomes cheaper; when they rise, your instalments increase and your total cost grows with them. These products are rare in dealer-arranged finance and tend to appear mainly in personal loans or flexible lending products offered by banks.

Fixed vs floating payment examples

A fixed rate keeps your monthly instalments steady, so you can map out your budget with confidence. Imagine borrowing £10,000 over four years at a fixed 8% APR. The instalment stays close to the same from the first month to the last because the rate never changes. You know exactly what you’ll repay, and the total interest remains predictable.

A floating rate behaves differently because it moves with the market. Take the same £10,000 over four years starting at 7% APR. If the base rate rises by one percentage point halfway through the term, the lender adjusts your rate, and the instalment increases to reflect the higher borrowing cost. A small rise can add a noticeable amount over the remaining months, and if rates fall, the opposite happens and the instalments reduce. The loan becomes cheaper or more expensive purely because the underlying rate shifts.

Can you choose fixed or floating?

You can choose between fixed and floating in some situations, but the choice isn’t always available in every type of car finance. Most HP and PCP agreements only come with a fixed rate because lenders build the entire repayment structure around predictable monthly instalments. That fixed design makes the deal easier to manage and reduces the risk of payment shocks, so it’s the default option in dealer and broker finance.

Choice becomes possible mainly when you use a personal loan to buy the car. Banks sometimes offer both fixed and floating versions of their standard lending products, and the floating option usually tracks the Bank of England base rate or a similar benchmark. If you qualify for both, you decide whether you want stability or flexibility, but you also accept the possibility of rising costs if rates move against you.

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