Fixed interest rates and floating interest rates have their advantages and disadvantages. Therefore, which option should be chosen depends on the personal and financial situation of the loan taker.

Whenever a loan is applied for, there is a need to consider many aspects. Similarly, information should also be gathered about the types of interest rates. There are two types of loan interest rates. Which include fixed interest rates and floating interest rates.

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Fixed interest rates and floating interest rates have their own advantages and disadvantages. Therefore, which option should be chosen depends on the personal and financial situation of the loan taker.

What is a fixed interest rate?

This is an interest rate that remains constant throughout the loan period. Neither there will be any change in it, nor there will be any increase, nor there will be 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 stable.

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 will be 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

Fixed interest rates are not affected by market fluctuations. Due to which you can ensure your financial security. However, in general, fixed interest rates are slightly higher than floating interest rates.

When will it be beneficial

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

What are floating interest rates?

Floating interest rates are affected by market fluctuations. 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 become low.

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 rates are quite economical compared to fixed interest rates. In this, the initial rates may be low in the beginning.

Benefits when interest rates fall

Floating interest rates depend on market conditions. So if the interest rate in the market is low, then you will have to pay less interest. Which can potentially reduce your interest cost.

Disadvantages of floating interest rate

· If you choose a floating interest rate loan, then you should know that it involves risk. Due to this, there can be more pressure on your budget. Like, paying 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.

If you have a good ability to manage market fluctuations, then it can also be better for you.

Difference between fixed interest rate and floating interest rate

Reasons for difference

Fixed interest rate

Floating interest rate

Situation

It remains the same during the entire period of the loan. That is, the EMI of the loan will remain the same throughout the period. Whatever the market situation is.

These interest rates keep increasing or decreasing according to the market situation. Therefore, the EMI in this can be sometimes more or sometimes less due to changing interest rates.

Risk

This is a less risky option, because it is not affected by market fluctuations.

This is a more risky option, because as the interest rates in the market increase, your EMI will also increase.

When will it be profitable

If you feel that interest rates may increase in the future.

If you feel that interest rates may fall in the future.

For whom is it suitable

This is more suitable for those who do not want to take risk. And want to be sure about their EMI.

This option can be better for those people who have the capacity to take risk.

Prepayment penalty

Sometimes you may have to pay a penalty for prepayment of the loan.

Generally there is no prepayment penalty in this.

Financial planning

By choosing this, you can easily make a budget for the future. Strong financial planning can be done.

Due to the fluctuations in the market, it becomes a little difficult to do the right financial planning.

Which option to choose between fixed interest rate and floating interest rate?

Before taking a loan, customers should decide keeping in mind their financial and risk-taking capacity.