If you’re new in the market for a loan, you probably might have come across the term fixed and floating interest rate. Whether you’re looking for a personal or a home loan, it’s imperative to understand these terms to make an informed and correct choice. With technology advancement, making things more personalized and transactions timely, Personal Loans App such as Fullerton has come to the rescue.

To take maximum advantage of your loan through an online loan app, you need to understand interest rates structures and how it affects repayment. 

What is a Fixed Interest rate?

A fixed interest rate means the interest rate remains fixed throughout your loan repayment tenure. The rate of Interest does not vary irrespective of the change in repo rate by RBI, followed by EMI remaining indistinguishable. 

Benefits

1. Interest rate: The interest rate is identical throughout the loan tenure irrespective of the change in market conditions, providing you with a safer financial environment.
2. EMI: Similar to interest rate, EMI remains unchanged, therefore giving you a better opportunity to plan out your monthly budget and financial savings accurately.

Drawbacks

1. High-Interest Rate: Compared to the floating rates, fixed-rate is usually 1-2% higher offered by NFBCs.
2. Fixed-rate: Even if there’s a reduction in fixed rate by the RBI, the loan remains unchanged from the previous interest rate. As a result, you still have to pay a higher rate of Interest after the rate cut.

Why is a Fixed Rate of Interest Ideal?

1. Steady EMI: Fixed-rate allows you to have a fixed repayment schedule at an interest rate that you’re comfortable paying with no fluctuation in EMI.
2. Rate hike in the Future: The interest rate may rise high; if you foresee such a scenario before the rise, you may lock the current rate offered by the borrower.
3. The falling rate of interest cycle: You can safely seal at the current rate when the market is at the end of the falling interest rate cycle. This factor will ensure there’s no influence on your loan.

What is a Floating Interest rate?

According to the market scenario, a Floating Rate of Interest indicates variation in the interest rate during the loan repayment tenure. The Interest charges on loan are attached to the base rate, determined by the RBI on various economic factors.

Benefits

1. Lower interest rate: Floating rates are usually 1-2.5% lower than fixed rates offered by the lender. 
2. More savings: A decrease in interest rate results in savings where the EMI composition reduces with an increase in principal amount, further reducing the future interest disbursement.

Drawback 

1. Unpredictability: Floating interest rate depends on the changes made by RBI. It is fluctuating in nature and difficult to cast future expenses.
2. Impact on budgeting: Due to unpredictable market conditions, the significant increase and decrease in rates can result in inconvenience in budgeting for the borrowers.

Why is the Floating rate of interest Ideal?   

1. Predictable decrease in future: If the market condition at present indicates a reduction in interest rate in future. One can likely benefit by choosing a floating rate at a lower rate.
2. End of rising interest cycle: If the market is moving towards increasing rates, it’s best to avail benefit because there’s a possibility of a rate cut in the future.  
3. Lack of Insight: Floating rate is appropriate for people who do not have enough insight into the market and want to twig to the market rates.

Fixed v/s Floating- Which one to choose? 

Having discussed the two in brief, here’s an overview before you choose an interest according to your suitability.

1. Market Knowledge: If you are well aware of the loan market and expertise under which condition the market increases and decreases, it’s safer to go for floating rates other than fixed to ensure financial stability.
2. Predetermined EMI: you can opt for a fixed interest rate when you’re comfortable paying fixed Emi irrespective of the prevailing market condition.
3. Increase in Income: You can pick a floating interest rate over fixed when you see a potential expansion in your income, and the rise in speed does not affect your other financial commitment.

Must Read: Reasons Why Online Personal Loans are Gaining Popularity

Besides the above mentioned factors, choosing an interest depends on your choice, knowledge, personal experiences, and the benefit you may prevail from selecting a specific interest rate. If you’re still hesitant about your choice, you can opt for an in-built EMI calculator in Fullerton’s instant loan app. Feel free to consult our top advisors in case of queries; we’re always here to help you out!