Fixed vs Floating Interest Rates

These are the benefits of a fixed interest rate based on various parameters:

• Interest rate: The interest rate remains constant throughout the entire loan tenure and is not affected by market conditions.
• EMI: Since this interest rate doesn't fluctuate over time, your EMI remains fixed, making it easier to more accurately plan your monthly budget and long-term financial savings or investments.

Drawbacks of Fixed Interest Rate

Some of the drawbacks of a fixed interest rate are as follows:

• The fixed interest rate is usually 1% to 2.5% higher than the floating interest rate offered by a bank or non-banking financing company (NBFC).
• Even if the fixed interest rate reduces after an announcement from the Government or Reserve Bank of India (RBI), it doesn't affect the loans already borrowed using the previous interest rate. The borrower will have to continue repayment at the higher interest rate even after a rate cut.

• Many a times, the fixed rate of interest is only valid for a couple of years after which the interest rate gets revised according to the ongoing rate.

Why choose a Fixed Interest Rate?

These are some of the scenarios in which a fixed rate of interest may be beneficial for you:

• You prefer a fixed repayment schedule and are comfortable paying the current interest amount. You should ensure that your monthly installment isn't more than 30% of your net monthly salary.

• You foresee a rise in the interest rate in the future and, therefore, want to ensure that your interest amount doesn't increase more than what you are currently paying. In such a scenario, the fixed interest rate can be used to lock in the current rate of interest being offered by the lender.
• In cases where there has been a decline in the interest rates and it is likely to remain the same for a few more years.

What is Floating Interest Rate?

A floating interest rate varies with the market scenario. The interest will be calculated on a base rate with a floating element being added so that when the base rate changes, the floating rate also changes.

Benefits of Floating Interest Rate

The benefits of a floating interest rate are as follows:

• Floating interest rates are usually set 1% to 2.5% lower than the fixed interest rate offered by the same lender.
• The floating interest rates offered by a bank or non-banking financing company is usually lower than the fixed rates it offers its customers. Therefore, it means that even if the floating interest rate increases, it can still be less than the previous fixed interest rate offered.

• In case the floating interest rate exceeds the interest rate, it will not be for the entire loan tenure. There are chances that the floating rates might come down after a certain period of time.
  

What is the floating interest rate on loan against property? 

Here are the details regarding the floating interest rate on loan against property: 

• Floating rates are revised every quarter and the rates on loan are pegged with base rate which is further determined by the Reserve Bank of India (RBI) depending on various factors, such as economic factor. 
• Change in base rate causes change in loan interest rates as floating rates are linked with base rate 
• Changes in rates does not affect the EMI but the tenor of the loan 
• As per the RBI rules, prepayment penalty cannot be applied by lenders 

What is the Fixed Interest Rate on a Loan Against Property?

Here are the details regarding the fixed interest rate on loan against property: 

• If the lending rate is fixed for the entire loan tenor, then it is fixed interest rate which is generally 1.00% to 2.00% higher than the floating interest rate 
• Fixed interest rate ensures fixed EMI during the loan tenure 

Note: Fixed rate changes to floating rates for long-tenor loans, such as mortgage loan, in a few years and is known as reset. 

When to choose a floating interest rate? 

The following are scenarios when you need to choose a floating interest rate: 

• If it is perceived that base rate may change, then you may choose floating interest rate as the interest rate on loan may also change due to base rate fluctuation 
• Choosing a floating interest rate is beneficial if you presume that there may be a potential rise in income as making prepayment of loan helps you to pay off faster and reduces the total interest levied on the loan. 

When is a Fixed Interest Rate Ideal?

The following are scenarios when you need to choose a fixed interest rate: 

• You must choose fixed interest rate if you are comfortable in repaying your loan in EMIs so that there is no sudden change in the interest rates 

• Fixed interest rate is a safer option when you do not want to take market risk associated with change in interest rates 
• Planning finances becomes easier with fixed interest rates as the EMI amount and tenor are predetermined 

Drawbacks of Floating Interest Rate

The drawbacks of a floating interest rate are as follows:

• Due to the fluctuating nature of floating interest rates, the monthly installments of a particular amount of loan will vary throughout the entire loan tenure.

• Attributed to the uneven monthly installments, it is very difficult to budget a loan with floating rate of interests.
• Since it is not possible to have a fixed repayment schedule under this interest rate option, it can lead you to pay more than you are comfortable paying. This can, therefore, cause you to have less savings and no budget plan.