Fixed Rate vs Floating Rate

When you are looking for a new Home loan, you will hear terms like “fixed rate of interest” and “floating rate of interest.” Whether you’re getting a home loan or a personal loan, knowing these terms can help you choose the right type of interest rate for you, taking into account your financial needs and your ability to pay it back. Here is all the information you need about these two words.

A fixed rate of interest means that your interest rate won’t change while you’re paying back your loan. It doesn’t change even if the rates that banks charge for loans or the rates that the Reserve Bank of India charges for short-term loans change (RBI). Equated Monthly Instalments (EMI) will stay the same over the life of the loan. Some lenders offer loans with a fixed interest rate for only the first few years. After that, the interest rate changes to a floating rate.

Advantages of a Fixed Interest Rate

Here are some advantages of a fixed interest rate that is based on different factors:

• Interest rate: The interest rate stays the same for the whole loan period, regardless of how the market is doing.
• EMI: Because this interest rate doesn’t change over time, your EMI stays the same. This makes it easier to plan your monthly budget and long-term investments or savings.

Disadvantages of a Fixed Interest Rate

A fixed interest rate has the following disadvantages:

• Usually, the fixed interest rate is 1% to 2.5% higher than the variable interest rate that a bank or non-banking financing company offers (NBFC).
• Even if the government or the Reserve Bank of India (RBI) announces that the fixed interest rate will go down, it won’t affect loans that have already been taken out at the old interest rate. Even if the interest rate goes down, the borrower will still have to pay back the loan at a higher rate.
• Often, a fixed interest rate is only good for a couple of years. After that, the rate is changed to reflect the current rate.

Here are some situations in which you might benefit from a fixed rate of interest:

• You prefer a predetermined repayment schedule and are content with paying the current interest rate. You should ensure that your monthly installment isn’t more than 30% of your net monthly salary.
• You think that the interest rate will go up in the future, so you want to make sure that your interest payment doesn’t go up more than it is now. In this case, the fixed interest rate can be used to lock in the current interest rate that the lender is offering.
• In situations where interest rates have gone down and are likely to stay the same for a few more years.

A floating interest rate fluctuates according to market conditions. The interest will be calculated based on a base rate plus a variable rate. When the base rate changes, so does the variable rate.

Advantages of a Floating Interest Rate

• Most of the time, a lender’s floating interest rate is 1% to 2.5% lower than their fixed interest rate.
• Most of the time, a bank or non-bank financing company’s floating interest rates are lower than the fixed rates they offer. Therefore, even if the variable interest rate increases, it may still be lower than the previously offered fixed interest rate.
• If the variable interest rate is higher than the interest rate, it won’t be that way for the whole loan term. After a certain amount of time, there is a chance that the floating rates will go down.

Disadvantages of a Floating Interest Rate

• Since floating interest rates change over time, the monthly payments for a certain loan amount will change over the course of the loan’s life.
• A loan with a variable interest rate is hard to budget for because the monthly payments are not the same amount every month.
• Since you can’t set a fixed payment schedule with this interest rate option, you might end up paying more than you can afford. This can cause you to have less money saved and no plan for how to spend it.

Here are some situations in which you might benefit from a variable interest rate:

• When there are good reasons to believe that interest rates will go down in the future.
• Most of the time, this type of interest rate is good for people who don’t know enough about the market and want to stick to the market rates.

Disclaimer: The opinions shown above are mainly for informational reasons and are based on market research. Deal Acres is not responsible for any actions made as a result of relying on the provided material and makes no representations as to its accuracy, completeness, or reliability.