Fixed vs Floating Education Loan Interest Rate
If you have been thinking of getting an education loan, you might have already heard of fixed and floating interest rates. As the name suggests, a fixed interest rate stays constant throughout the loan period. And the floating interest rate, on the other hand, is flexible and can change over time.
It is important to know all about these two types of interest rates if you are planning to take out education loans. This can allow you to make a well-informed decision on which one to choose, according to your needs and goals. Here is everything you need to know about fixed and floating interest rates:
Fixed Interest Rate
In simple terms, fixed interest rates are the type of interest that does not undergo any changes. It stays at the same rate as it was at the beginning of the loan tenure. The pros and cons of opting for a loan with a fixed interest rate include:
Pros
- Predictability is a huge advantage of fixed interest rates. As the interest rate stays the same, it is easier to plan your finances and spend accordingly.
- Fixed interest rates are beneficial, as the fluctuations in the market interest rate will not affect you.
- Lower Risk
Cons
- You will not benefit in the scenario of the market interest rates falling. As it is fixed, you will have to pay the same higher amount.
- Fixed rates are also generally higher than the floating rates.
Floating Interest Rates
Floating interest rates are the type of interest that changes throughout your loan tenure. The rates can go up and down based on financial market conditions. If you pick an education loan with a floating interest rate, these market changes will impact you in both positive and negative ways.
Pros
- If the market interest rate falls, you can save more money and pay a lower EMI.
- The floating interest rates are also lower than the fixed rates, which makes them more appealing.
Cons
- The unpredictable nature of the floating interest rate is one of the major cons that need to be considered. This makes budgeting more complex and troublesome.
- There is always a risk of having to pay a higher interest rate, which can put a strain on your finances.
- Higher risk
Difference Between Fixed and Floating Interest Rates
The key differences between fixed interest rates and floating interest rates are as follows:
- Fixed interest rates remain constant, as floating interest rates are unstable.
- Fixed interest rates are not affected by the changing market rates, whereas floating interest rates are.
- Fixed interest rates have a higher initial interest rate, while floating interest rates are initially lower.
Factors to Consider While Choosing
There are some factors that you need to check before choosing either of the interest rate types. They are:
- First, you need to have a basic understanding of the market trends. This will allow you to decide whether to take calculated risks or go for a safer alternative.
- It is essential to take the loan tenure into consideration while choosing the type of interest rate. It will be beneficial to plan accordingly, as loans with longer tenures can be beneficial with fixed interest rates and vice versa.
- Your financial stability should also be taken into account.
How do fixed and floating Interest rates work?
There are certain things to know regarding bank interests to fully understand how both interest rates work. They are:
- Repo Rate: The repo rate is the rate at which the Reserve Bank of India lends money to the banks.
- Marginal Cost of Funds Based Lending Rate (MCLR): This refers to the minimum interest rate offered by a bank.
If you choose a fixed interest rate, your interest stays the same throughout your loan tenure. If the repo rate is 6% and the bank’s margin is 3% initially, all you will have to pay is a 9% (6% + 3%) interest rate till the end of your loan tenure.
If your loan has a floating interest, and the repo rate increases to 7%, your interest rate can fluctuate to 10% (7% + 3%). That means if the repo rate goes from 6% to 7%, this increase can be reflected in your interest rate.
FAQs on Fixed vs Floating Education Loan Interest Rate
- Which one is better? Fixed or floating interest rate?
Both interest rates have their benefits and disadvantages. You can choose one according to your needs, financial stability, loan tenure, etc.
- Do all banks offer education loans with fixed and floating interest rates?
No, the interest rate types are set by the banks. Some offer both fixed and floating interest rates for education loans, and others don't.
- I am planning to take out a long-term overseas education loan. Which one would be suitable for me?
For loans with longer tenures, it is generally advised to choose a fixed interest rate as it is a more stable option.
- Can I switch from a fixed interest rate to a floating interest rate?
Yes, you can switch from a fixed interest rate to a floating interest rate during the tenure of your loan and vice versa. There might be some fees involved, as well as guidelines regarding the switching process.
- Which interest rate allows you to save more?
This depends on the market rates. If you choose a floating interest rate, and the market rates decrease, you can save more as your payment also decreases. And if it increases, you will benefit more from a fixed interest rate, as you wouldn't have to pay a higher amount.
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