What are fixed and floating interest rates for loans? Which option will be right for you?
Siddhi Jain March 01, 2025 01:15 AM

Fixed interest rates and floating interest rates have their advantages and disadvantages. So which option should be chosen depends on the personal and financial situation of the borrower.

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Fixed interest rates and floating interest rates have their own advantages and disadvantages. So which option should be chosen depends on the personal and financial situation of the borrower.

What is a fixed interest rate?

This is an interest rate that remains constant throughout the loan tenure. There will be no change in it, neither there will be any increase nor any decrease.

By choosing a fixed interest rate, the interest rate of your loan remains unchanged even after the fluctuations in the market conditions. It can have advantages as well as disadvantages. In this, the payment or return remains constant.

Understand with an example

For example, let's assume that you have taken a loan for 20 years and its interest rate is 8%. If you pay an EMI of Rs 22000 every month, then you will have to pay the same amount during your entire loan period.

What are the benefits of choosing a fixed interest rate

If you choose a fixed interest rate during the loan period, then you get many benefits from it. Such as

Stability during the payment period

The amount of interest paid by you remains the same during the entire payment period. Due to which you can easily plan your finances.

Not affected by market fluctuations

The market fluctuations have no effect on the fixed interest rate. Due to which you can ensure your financial security. However, in general, the fixed interest rate is slightly higher than the floating interest rate.

When will it be beneficial

Choosing a fixed interest rate will be beneficial for you when you are not ready to face the fluctuations in the market. In such a situation, fixed interest rate will provide financial stability for you.

What are floating interest rates?

Floating interest rate is affected by the fluctuations in the market. It does not remain the same for a long time. If the interest rate in the market is low, then the floating interest rates also decrease.

In such a situation, floating interest rates are more beneficial than fixed interest rates. In this type of interest rates, you can get many benefits of low payment along with high risk.

Benefits of floating interest rates

Low payment in the beginning

Floating interest rate is very economical as compared to fixed interest rate. In this, the initial rates can be low in the beginning.

Benefit is there when interest rates fall

Floating interest rate depends on market conditions. Therefore, if the interest rate in the market is low, then you will have to pay less interest. Due to which there can be a potential reduction in your interest cost.

Disadvantages of floating interest rate

If you choose floating interest rate of loan, then you should know that it involves risk. Due to this, there can be more pressure on your budget. Like taxing extra expenses or saving money can be a challenging task for you.

It is difficult to make financial plans for the future in this. That is why it can be difficult for you to make any savings plan for the long term because the interest rates change suddenly in it.

Floating interest rate keeps changing according to the interest situation, so you cannot make the right estimate for the future.

In this case, floating interest rate will be better for the loan

When interest rates are expected to fall in the future, then choosing floating interest rates while taking a loan can prove to be a better option for you.

It can also be beneficial for short-term loans.

It may also be better for you if you have a good ability to manage market fluctuations.

Difference between fixed interest rate and floating interest rate

Difference Fixed Interest Rate Floating Interest Rate
Status Remains the same throughout the loan tenure. This means the EMI remains unchanged regardless of market conditions. These interest rates fluctuate based on market conditions. As a result, EMI may increase or decrease accordingly.
Risk This is a low-risk option as it is not affected by market fluctuations. This is a high-risk option because if interest rates rise in the market, your EMI will also increase.
When it is beneficial If you believe interest rates may increase in the future. If you believe interest rates may decline in the future.
Suitable for Suitable for those who do not want to take risks and prefer a fixed EMI. Suitable for those who can take risks, as this option may be more beneficial.
Prepayment Penalty Sometimes, a penalty may be charged for prepayment of the loan. Generally, no prepayment penalty is charged.
Financial Planning Choosing this option allows for easy future budgeting and strong financial planning. Due to market fluctuations, accurate financial planning becomes a bit challenging.
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