Fixed vs floating interest rates: Differences, impact on loan repayments
What's the story
In India, the choice between fixed and floating interest rates can be a tough one, especially when it comes to loans. Both have their own pros and cons, and knowing them can help you make an informed decision. Here's a look at the key differences between fixed and floating interest rates, and how they can affect your loan repayments.
Fixed rate
Understanding fixed interest rates
A fixed interest rate stays the same throughout the entire tenure of the loan. This means that your monthly EMI will remain constant, making it easier to budget and plan your finances. Fixed rates are ideal for those who prefer stability and predictability in their payments. However, fixed rates may be higher than floating rates at the time of borrowing.
Floating rate
Exploring floating interest rates
Floating interest rates fluctuate with market conditions. They are usually linked to a benchmark rate that changes periodically. This means that your EMI can go up or down depending on how the market behaves. Floating rates may start off lower than fixed ones, but come with the risk of increasing EMIs if market rates rise.
Pros of fixed rates
Pros of fixed interest rates
The biggest advantage of fixed interest rates is predictability. Borrowers know exactly how much they need to pay every month, which helps in budgeting. There's no risk of sudden hikes in EMIs due to market fluctuations, making it easier for borrowers to plan their finances over the long term.
Pros of floating rates
Pros of floating interest rates
Floating interest rates usually start lower than fixed ones, which can mean lower initial payments. If market conditions are favorable and rates go down, borrowers could benefit from reduced EMIs without having to refinance their loans. This flexibility can be advantageous for those willing to take on some risk for potential savings.
Decision factors
Factors influencing your choice
When choosing between fixed and floating rates, consider factors like your risk tolerance, financial stability, and market outlook. If you expect interest rates to fall or remain stable, a floating rate might work well. Conversely, if you prefer certainty in your payments regardless of market changes, a fixed rate could be more suitable.