Fixed charges vs floating charges: which is better for you?
When applying for a loan or mortgage, you may come across the terms fixed charge and floating charge. These are forms of security that lenders take over a borrower’s assets to reduce risk in case of non-payment.
If you’re taking out a home loan, business loan, or secured credit facility, understanding the difference between fixed and floating charges is essential. Choosing the right one could impact your financial flexibility and risk exposure.
What is a fixed charge?
A fixed charge is a security interest attached to a specific asset that cannot be sold or transferred without the lender’s consent. The asset remains locked in place until the loan is repaid.
💡 Examples of assets subject to fixed charges:
✅ Property or real estate (e.g., Loan, Cash, CDS, Portfolio)
✅ Vehicles financed through a car loan
✅ Machinery or equipment used in business
🔹 Key benefits of fixed charges:
✅ Lower interest rates – since the lender has high security over a specific asset, they may offer better loan terms.
✅ Stability – fixed charges provide certainty over the asset’s security.
✅ Easier loan approval – lenders are more willing to finance secured assets.
🔹 Potential drawbacks:
⚠️ Limited flexibility – you cannot sell or use the asset freely without the lender’s approval.
⚠️ Higher risk of repossession – if payments are not met, the lender can seize the asset to recover their money.
📌 Best for: Mortgages, business loans with heavy equipment, car loans.
What is a floating charge?
A floating charge is a security interest over a group of assets that can change over time. Unlike a fixed charge, assets under a floating charge can be used, sold, or replaced by the borrower in the normal course of business.
💡 Examples of floating charge assets:
✅ Business inventory and stock
✅ Accounts receivable (money owed to a company)
✅ Cash flow and working capital
🔹 Key benefits of floating charges:
✅ More flexibility – businesses can buy, sell, and trade assets as needed.
✅ Covers multiple assets – useful for securing broad categories of property.
🔹 Potential drawbacks:
⚠️ Higher interest rates – lenders take more risk as the assets securing the loan change over time.
⚠️ Risk of crystallisation – if a borrower defaults or goes into liquidation, the floating charge becomes fixed, meaning assets can be seized.
📌 Best for: Business loans, working capital financing, lines of credit.
Fixed vs Floating charges: Which should you choose?
Factor | Fixed Charge | Floating Charge |
Best suited for | Mortgages, car loans, business loans with property or equipment | Business loans, inventory financing, revolving credit |
Flexibility | Low – assets cannot be sold without permission | High – assets can be bought, sold, or replaced |
Interest rates | Lower | Higher |
Lender security | High – specific assets are pledged | Moderate – assets are changeable |
Risk to borrower | Repossession of pledged asset | Crystallisation in case of default |
📌 Final takeaway:
✔ Choose a fixed charge if you want lower interest rates and are pledging a high-value asset like a home or vehicle.
✔ Choose a floating charge if you need flexibility, especially for business purposes.
