Fixed vs Variable Business Loan

nunez125

When I read about fixed vs variable business loans, I always thought it referred to the interest rate being either fixed or variable (and therefore the repayments also fixed or variable as a result), but the loan term remaining fixed.

I spoke to a bank lending manager about a loan and they called it a variable business loan, but they said that although the interest rate moves around as the base rate changes, the repayment stays the same every month. Instead of varying the repayment, they add or subtract any variation due to interest rate variations, to the remaining loan balance rather than the repayments.

That way it is a flexible loan, but where the repayments stay the same, and it is the loan term that is variable in response to the variable interest rate. Therefore it just alters when the loan is paid off (alters the term of the loan, rather than the repayment amounts).

I have not heard of it done this way before (though I do not have a lot of experience), and can’t find mention of this online, so I wonder if they have explained it incorrectly, or if I have misunderstood it. Has anyone else heard of this type of loan, and if so is there a name for it so that I could read up on it?

retiredbanker1

I'm with the business manager here.
It would be too cumbersome to amend monthly payments every time base rate changed.

A fixed rate loan gives you xx repayments over yy months.
Flexible means xx repayments which might the loan is repaid sooner (or later) depending on how interest rates moved during the loan.