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When you apply for an instant personal loan, the loan offer comes with an interest rate and a specific tenure by which you have to complete repaying the loan. Now, the interest rate that gets accrued on your personal loan offer can either be fixed or floating.
If you are not sure what is the meaning behind these two terms, and whether you should go for a fixed interest personal loan or a floating interest personal loan, then this blog is for you. We will dive into a detailed comparison between the two, and then, you can decide which is the personal loan offer that you should go for.
Let’s get started.
Fixed Interest Rate vs. Floating Interest Rate
Here is a table to make the differences between the two stand out:
| Aspect | Fixed Interest Rate Personal Loan | Floating Interest Rate Personal Loan |
| Interest Rate Stability | Remains constant throughout the loan tenure. | Can change over the loan tenure based on market conditions. |
| Monthly EMI | Fixed EMIs, providing predictability and ease of budgeting. | EMIs can vary, leading to potential uncertainty in budgeting. |
| Benefit from Rate Drops | Does not benefit from a decrease in market interest rates. | Benefits from a decrease in market interest rates, reducing EMIs. |
| Risk of Rate Increases | No risk, as the rate is locked in for the entire tenure. | Risk of higher EMIs if market interest rates rise. |
| Suitability | Ideal for borrowers seeking stability and predictability in repayments. | Suitable for borrowers who can manage variability and want potential savings. |
| Financial Planning | Easier to plan finances due to fixed monthly payments. | Requires more flexible financial planning due to variable EMIs. |
| Market Conditions Impact | Insulated from fluctuations in market interest rates. | Directly affected by changes in market interest rates. |
| Complexity | Simple to understand and manage due to consistent repayment amounts. | Requires monitoring of interest rate trends and understanding impact on EMIs. |
| Loan Tenure Consideration | Often preferred for short to medium-term loans. | Can be advantageous for longer-term loans if market rates are expected to fall. |
What is a fixed interest rate personal loan?
A fixed interest rate on a personal loan remains constant throughout the loan tenure. When you opt for a fixed-rate personal loan, your monthly EMI (Equated Monthly Instalment) payments will remain the same, regardless of any changes in the market interest rates.
What are the benefits of choosing a fixed interest personal loan?
Here are some of the best benefits that you can get when you choose a fixed interest personal loan:
- Since the interest rate does not change, you can accurately predict your monthly payments. This helps in better budgeting and financial planning.
- Fixed rates offer stability and peace of mind, especially in a volatile interest rate environment. You are shielded from market fluctuations.
- With fixed rates, you do not need to constantly monitor interest rate trends or worry about your loan payments changing unexpectedly.
Not sure how a fixed interest rate personal loan will affect your finances? Just use any personal loan EMI calculator and find out how you can manage your expenses in the future, along with repayment of the loan.
Read more: What is repo rate by RBI?
What is a Floating Interest Rate Personal Loan?
A floating (or variable) interest rate on a personal loan can change over the loan tenure. These rates are usually linked to a benchmark rate, such as the Reserve Bank of India’s (RBI) repo rate or the lender’s base rate. When these benchmark rates change, the floating interest rate is adjusted accordingly, leading to changes in the EMI amounts.
Read more: What is personal loan refinancing?
Benefits of choosing a Floating Interest Personal Loan
Here are some of the best benefits that you can get when you choose a floating interest personal loan:
- Floating interest rates are generally lower than fixed rates at the time of loan disbursement, making them attractive to borrowers looking for lower initial payments.
- If the benchmark interest rates decrease, the interest rate on your loan also decreases, reducing your EMI and overall interest burden.
- Over the long term, borrowers can potentially save money if market rates trend downward or remain stable.
Thus, there are clear differences between the two. Whilst fixed rates provide stability and predictability, the floating rates can present the chance where you get to benefit from lower interest rates. Ultimately, the decision on whether you want to go for a fixed interest personal loan or a floating interest personal loan depends on your financial goals and how much appetite you have for risk. As always, the choice is up to you.
