The loan you get, no matter whether it is for a house, car or personal necessity, has one major factor to be considered, and that is called the interest rate. Which should you go for between fixed and floating interest rates?
This decision can affect how much you pay every month and how easily you can manage your loan. Let’s understand both options in simple terms and find out which one might be better for you.
What Is a Fixed Interest Rate?
A fixed interest rate is one that stays unchanged for the whole duration of the loan repayment. The rate does not change regardless of how the market rates go up and down. This can be compared to a fixed-price agreement, where you always know what is the amount to be paid.
For example, by taking a home loan of ₹20 lakh at a fixed rate of 9% for 10 years, you will have the same EMI from the beginning until the end.
Advantages of Fixed Interest Rate,
- Your EMI remains constant, no surprises.
- Easier to plan your budget for the month.
- Best during periods of rising interest rates..
Disadvantages of Fixed Interest Rate,
- Your rate remains high even when the market rates drop.
- The interest rate is somewhat higher than the floating ones.
What Is a Floating Interest Rate?
A floating interest rate constantly changes depending on the market and the Reserve Bank of India (RBI) policies. Whenever there is a change in the repo rate (the rate at which RBI lends money to banks), the banks raise or lower the loan rates accordingly.
Example: In case your housing loan is linked to the repo rate and the RBI reduces it, the interest rate of your loan may also come down, leading to reduced EMIs.
Advantages of Floating Interest Rate
- When market rates fall, you can still gain.
- Typically, it starts with a lower rate than fixed loans.
- Go well with borrowers in the long run.
Disadvantages of Floating Interest Rate:
- EMIs can increase when rates rise.
- Harder to plan your monthly budget.
- It can cause stress if income is not steady.
Key Difference Between Fixed and Floating Interest Rate
| Feature | Fixed Interest Rate | Floating Interest Rate |
| Rate Stability | Constant throughout the loan term | Changes with market rates |
| EMI Amount | Same every month | Increases or decreases |
| Best When | Rates are expected to rise | Rates are expected to fall |
| Risk Factor | Low | Moderate to high |
| Flexibility | Less flexible | More flexible |
| Interest Rate (usually) | Slightly higher | Slightly lower |
When Should You Choose a Fixed Interest Rate?
You should opt for a fixed interest rate in case,
- You prefer stability and hate surprises..
- You think that the rise in interest rates will soon be the case.
- You want to set a budget with fixed monthly payments.
- Your loan term is short (up to 5 years).
Fixed interest rates are perfect for people with regular and reliable incomes who are not willing to risk losing their money due to unforeseen market changes.
When Should You Choose a Floating Interest Rate?
You should opt for a floating interest rate in case,
- You think that there might not be an increase in interest rates and that they might actually drop in the coming years.
- You are okay with minor fluctuations in the amount of your EMI.
- Your loan term is long (more than 10 years).
- You want to benefit from the rates that are linked to the market.
Floating rates can be very beneficial in the long run, especially if the market conditions remain stable or favourable.
Tips to Decide Which Interest Rate Is Better
- Verify the current market trend.
In case the rates are at a low level but there is an expectation of a rise, then fixed should be chosen. In contrast, if the rates are high but there is a prediction of a fall, then floating may be considered as the option.
- Identify your risk tolerance.
If you are the type of person who prefers being certain, the fixed rates will be your choice. On the other hand, if you can adjust to the shifts, the floating option might be a good fit for you.
- Take into account the term of the loan.
Fixed rates are appropriate for loans with a short duration. In contrast, floating rates are more suitable for loans with a long duration.
- Evaluate your financial stability.
Fixed rates might be the option preferred by people with regular and stable incomes, whereas those with variable earnings might opt for floating rates.
Conclusion
Both fixed and floating interest rates have their own advantages. If you want a stress-free scenario with predictable EMIs, then a fixed rate should be your choice. However, if you don’t mind a little bit of ups and downs and want to benefit from possible rate cuts, floating rates may end up costing you less.
In the end, the choice will depend on your attitude towards risk, your income pattern, and your financial goals. Therefore, it is advisable to compare the two options very well before making a loan decision and selecting the one that suits your needs.
By grasping the difference between fixed and floating interest rates, you will be able to make a confident and astute borrowing decision.
