What is a Fixed Interest Rate?
People who take for Fixed Interest Rate show that people must repay the loan in equal EMI instalments as per the loan tenure. The benefit of the fixed interest rate is that it would not change even if there are fluctuations or changes in the financial market conditions or trends. Fixed Interest rate is the most preferable during the financial market down. Peoples take the chance by blocking or fixing the interest rate as per their preference. In simple terms, if you imagine that the financial market will not collapse underneath a specific point or anticipate an increase in the interest rates, then picking fixed interest rate shall be the best option to avail.
Fixed interest rate means that the interest rate is fixed for the entire loan tenure. Generally, fixed interest rates are 1% to 2% higher than floating interest rates.
When is a Fixed Interest Rate Is Ideal?
- A fixed interest rate is perfect if the borrower is satisfied with the EMI you are repaying and they do not want any surprises. Try and keep the EMI at 25% or less of your salary to ensure you meet the EMI repayment deadlines without anxiety.
- Fixed interest loans help you to organise your finances better as the EMI and the tenure are decided.
- It also helps when you do not want to take market risks associated with an increase in interest rates.
What is Floating Interest Rate?
Interest rate which is variable and keeps on changing as per market situation is called Floating Interest Rate. Floating Interest Rate depends on the base rate offered by many banks, so whenever the base rate changes, the interest rate goes automatically renewed. As compared to the fixed interest rate, floating rates are relatively more reasonable. Fixed interest rates are costlier than the floating interest rate. The increase and decrease in the floating interest rate are temporary, as it varies as per the financial market trends.
Changes, if any, in the interest rate during the tenure of the loan will not affect the EMI; alternatively, the tenure of the floating interest loan will change. On loans with floating interest rates, banks cannot apply any prepayment penalty as per the rules of the RBI.
When to Choose a Floating Interest Rate?
- Choose floating interest rates when you perceive that the base rate will either stay constant or it will decrease over time. In this case, the interest charged on your loan will either stay the identical or decrease.
- Also, choosing a floating interest provides you to make prepayments with excess income that can help you repay your loan faster and also reduce the total interest levied on your loan. So, if you see possible growths in your income in the future, a floating interest may work better.