Know Everything About Fixed vs Floating Rates

Author : pardeepsharma
Publish Date : 2021-06-06 15:37:48
Know Everything About Fixed vs Floating Rates

Till February 2021, the repo rate in India remained constant at 4% after consecutive cuts in policy rates between 2019 and 2020. It paved the way for intending borrowers looking to avail of low-interest credits. Nonetheless, existing borrowers can also reap the benefits of low interest rates by transferring their outstanding balance. Besides several other factors, the interest type opted for plays a crucial role in determining the total cost of borrowing. 

Primarily, there are two types of interest rates in India - fixed and floating rates. It is, first, necessary to study fixed vs floating interest rates to leverage optimum benefits. Let’s start with the definitions of each of these interest types. 

What are fixed interest rates?

With this type of interest rate, borrowers have to service pre-decide, fixed EMIs for the entire tenor. Fixed rates are decided at the initial phase of availing an advance and therefore remain the same throughout the life of a personal loan. 

The fixed vs floating interest rates comparison also asserts that a fixed rate does not change with any macro-economic factors, whereas floating rates get affected by the same. 

Resultantly, a fixed interest rate allows individuals to plan their finances better, wherein there is no chance of fluctuations in the future. Since borrowers are aware of the interest rate initially, they can estimate their equated monthly instalments and clear their debt without delay. 

However, typically, a fixed interest rate is most likely higher than its floating counterpart. 

What are floating interest rates?

As the name suggests, this interest type depends on market conditions. The fluctuations in this interest type can be either internally or externally influenced. Most financial institutions link their floating interest rates either with RRLR. Hence, any change in this factor affects personal loan interest rates.

For instance, if you avail of a personal loan with an interest rate linked to RLLR with a reset period of 6 months, the interest rate will change after that period. While it transmits the benefits of rate reductions to borrowers, it also hinders financial repayment planning. 

Hence, deciding on fixed vs floating interest rates is crucial to estimate the overall borrowing cost. It is imperative for borrowers to predict market conditions to make the most of their choice. 

Difference between fixed and floating interest rates

Following are some fixed vs floating interest rates pointers that borrowers need to consider. 

  • A fixed interest rate allows you to determine the repayment liability better when compared to floating rates. 

  • Floating interest rates allow borrowers to reap benefits of reduction in rates during the tenor, which is not possible with a fixed interest rate.

  • A fixed rate is the best option when there is a possibility of an increase in interest rates. On the contrary, the floating rate is suitable when the market conditions indicate reductions in interest rates. 

Select financial institutions like Bajaj Finserv also offer an online personal loan up to Rs.25 lakh with a Flexi loan facility that further reduces the interest and EMI burden. It permits you to pay interest only on the fund utilised and not on the whole corpus borrowed. 

The NBFC also brings pre-approved offers that simplify the loan availing process. Such offers are available on a range of financial products like personal loans, business loans, credit cards, and several others. You can check your pre-approved offer simply by entering your name and contact number online. 

Thus, deciding fixed vs floating interest rates helps you to manage your debt better while making the loan affordable. Nonetheless, before choosing either of the options, you need to weigh the merits and demerits of both of these types to facilitate a more informed decision. 



Category : world

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