As of May 2025, the Bank of England interest rate sits at 4.25%.
This figure has been steadily decreasing over the last 12 months from a peak of 5.25% – a favourable decline for both individuals and businesses.
But compared to fluctuations over the last 20 years, the current figure is still high.
Cost-effective financing needs to account for changes in interest rates to deliver the greatest value at the lowest costs.
In this blog, we explain how interest rate fluctuations impact your asset finance strategy and how you can secure leading deals to grow your business at a time of high interest.
As an independent asset finance broker, Kane Financial Services connects businesses in the UK and Ireland with competitive lenders in their niche. With our expert advice, you can boost revenue while maintaining flexible cash flow.
Apply for asset finance online today to explore your options.
How interest rate fluctuations influence asset finance
What is an interest rate?
An interest rate is the cost of borrowing money.
When you take out a financial product, you pay an additional percentage on top of what you borrow. That’s how lenders make a profit.
Let’s say you borrow £10,000 at an annual interest rate of 4.25%.
After one year, you’d owe £10,425.
And if your interest charges are flat, after two years you’d owe £10,850.
What is compound interest?
Most asset finance agreements use compound interest, which is a bit different.
This is when interest is added to your loan and you pay a percentage based on the new amount.
So if you borrow £10,000 at 4.25% interest, you’d owe £10,425 after one year.
But in the next year, you’d owe 4.25% interest on top of that new figure.
That means after your second year, your new total owed would be £10,868.
The longer your borrowing agreement, the more money you pay in interest.
But the faster you pay off a loan or asset finance agreement, the less money you owe overall.
However some agreements include an early repayment charge.
This ensures lenders can still make money even if you pay them back quickly.
Of course, this is a simplified example that doesn’t take into account any money you pay during your agreement period.
Consulting a trusted asset finance broker will give you clearer insight into how much you can expect to pay based on your specific financial product.
How do interest rates apply in asset finance agreements?
In asset finance, you borrow money to acquire assets like vehicles, equipment or machinery.
Higher interest rates mean higher monthly repayments and overall borrowing costs.
Lower interest rates reduce these costs, making asset finance more affordable and attractive.
Interest rates also affect the lender’s risk assessments and profitability.
When the base rate rises, lenders need to increase their rates to generate revenue.
This raises the cost of asset finance for you.
Changing interest rates also impact the availability and terms of asset finance products.
Fixed-rate vs variable-rate agreements
Asset finance agreements typically offer two types of interest rates:
- Fixed rate: The interest rate remains the same throughout your borrowing term. This lets you budget more effectively and protects you against interest rate increases.
- Variable rate: The interest rate can fluctuate in line with changes to a benchmark, which is usually the Bank of England base rate. This can offer savings if the interest rate falls. But you could pay more if it goes up.
Which agreement is best for you depends on your needs and current trends in interest rates.
Since rates have been falling over the last 12 months, you might feel that a variable-rate asset finance agreement is the most affordable.
But global economic factors can signal increases to interest rates long before they occur.
With expert forecasting, you can determine whether a fixed-rate or variable-rate asset finance agreement can save you money in the long run.
The experienced asset finance brokers at Kane Financial Services advise on the most affordable products based on the ebb and flow of global finance.
Before choosing an asset finance agreement, get in touch to see if you’re making a cost-effective decision.
Types of asset finance affected by interest rates
Leasing
A leasing agreement lets you use an asset without owning it.
The lessor buys the asset and leases it to you over an agreed term.
At the end of the agreement, ownership stays with the lender.
This is more affordable than buying an asset you don’t necessarily want to keep.
Leasing is a good option for businesses that need flexibility and off-balance sheet financing.
It’s ideal for assets that depreciate quickly or need to be replaced regularly.
Hire purchase
With a hire purchase agreement, you pay for an asset in instalments over time.
After the final payment, you take ownership of the asset.
This lets you gradually acquire vital assets that you can’t afford to buy outright.
Hire purchases usually require an initial deposit with the rest paid monthly.
They suit businesses who want to own high-value assets while maintaining healthy cash flow.
Refinancing
Refinancing lets you release capital tied up in owned assets by using them as collateral to borrow money.
The lender values the asset and offers a suitable loan to be repaid over time with interest.
If you default, the lender takes ownership of the collateral asset to recover their losses. This protects you from bankruptcy.
Refinancing is often used to improve liquidity or consolidate debt.
Operating leases
Similar to regular leasing, an operating lease offers short- to medium-term use of an asset without buying it.
The lessor retains ownership of the asset, as well as any associated risk.
Operating leases usually cost less than finance leases because the agreement periods are shorter.
But if you later decide to extend your lease, it could end up being more expensive overall.
What to watch out for in a high-rate environment
When interest rates are high, you need to balance how much you need an asset against the cost of financing.
Here are a few things you should take into account.
Impact on budgeting and cash flow forecasting
High interest rates mean more expensive monthly payments.
This comes out of your profits, which reduces your cash flow.
Taking out an asset finance agreement in a high-rate environment can still be an affordable way to grow your business.
But you need to budget accurately and intelligently, as even small rate hikes can increase outgoings in variable-rate agreements.
Before taking out a finance product, it’s important to stress-test your cash flow to ensure your business can thrive even if rates go up.
This will help you avoid overextending your capital and risk defaulting on your agreement.
Predictable fixed-rate asset finance deals are more stable. But these often come with higher initial costs.
Longer-term cost of equipment ownership
Rising interest rates mean financing equipment becomes more expensive over time.
To get the best deal, you must compare financing options while considering the asset’s depreciation rate and maintenance costs.
In a high-rate environment, long-term financing costs can outweigh the asset’s value or productivity gains. So you might benefit more from a short-term product.
If you only want to use the asset for a limited time, leasing is typically more affordable than hire purchase.
This also frees you from the responsibility of ownership and upkeep.
Challenges for capital-intensive industries
Industries like construction, logistics and manufacturing rely on expensive machinery and vehicles.
Interest rates are percentage based. So high rates can increase the cost of replacing or expanding these assets significantly.
This can delay investment, reduce your operational efficiency and increase downtime if aging equipment isn’t replaced.
Financing terms could also tighten, with lenders demanding stronger credit profiles or more valuable collateral.
As such, access to funding at times of high interest rates could make funding more difficult or costly.
Tips for financing under interest rate fluctuations
- Fix interest rates early: Locking in a fixed interest rate early protects you against future rate increases
- Reassess investment timing: If delaying equipment upgrades won’t impact operations, you might benefit from waiting for more favourable economic conditions
- Consider refinancing for better terms: If your existing finance deal carries high rates or restrictive terms, refinancing can boost cash flow with lower costs or more flexible payment structures
- Favour quick return on investment: Investing in assets that generate income quickly can offset higher borrowing costs and reduce financial pressure
- Consult with financial partners: Advisors and brokers can provide insights into market trends and risk management strategies, helping you find a tailored solution that meets you needs
How Kane Financial Services can help
As established, reputable finance brokers, Kane Financial Services provides thoughtful and unbiased advice on the right finance structure for your business.
We’ve spent more than 35 years developing a network of lenders with competitive options across a range of industries. And we can connect you with deals that offer better rates and terms than those of high street lenders.
In this time of economic uncertainty, our professional knowledge and insight help you choose between fixed- and variable-rate asset finance agreements.
With our support, you can grow your business with minimal cost and financial stress – even when interest rates are high.
Explore affordable asset finance options today
With interest rates falling over the last year, now is the perfect time to review your current or planned asset finance agreements.
Contact the experts at Kane Financial Services for tailored asset finance advice.