When taking a loan either from a bank or a NBFC, we have the option to choose between Floating and Fixed rate of Interest for repaying the Loans in Equated Monthly Installments (EMI). So how are these different and which one is more beneficial for us?
It is important that we choose wisely for two reasons:
A Fixed Rate of Interest means that loan to be repaid in the form of EMI will remain constant over the entire loan period. The interest rate is not associated with the market rates, so there would be no changes or fluctuations on EMI and tenor. During the initial part of the loan payments the majority of monthly payments are used to service the interest and the principal is served in the later parts of the tenure. Fixed rate payment becomes the first choice when financial market is down. Consumers take the opportunity by blocking or fixing the interest rate as per their preference for taking a loan. So if one thinks that financial market will not drop down below a certain point or there might not be a rise in the interest rates, then choosing fixed interest rate shall be the best option.
With Fixed interest rates, there is a sense of certainty as one knows beforehand of monthly installments and loan tenor.
Floating Rate of Interest as the name suggests keeps changing as per the market scenario. It is volatile and this type of interest rate depends on the base rate offered by different lenders. Whenever the base rate changes, the interest rate too gets automatically revised. It is generally subject to revision every quarter. Floating rates are comparatively cheaper to Fixed rates. Fixed interest rates charge around 1.5 % – 3% higher than the floating interest rate. The increase and decrease in these rate are temporary, as it varies on the market trends
Floating rates are becoming popular as the first choice for home buyers. Most Banks and NBFCs are offering Floating rate of Interest for home loan at low and attractive rate which starts from as low as 8.75%.
RBI determines the base rate based on various economic factors, and with any changes in base rates, affects the interest rate charged on the consumers.
Usually customers who are in their late 40’s prefer Fixed Interest Rate as they have decent time in hands before their retirement. They are in good position to meet the high interest rate and equated monthly installments (EMIs) as they are no longer debt ridden by this time of their age. It helps one to plan their finances better as the EMI and the tenor are predetermined as well as avoids being associated with the fluctuating market risks.
Whereas in case of Floating interest rate, people who are in the age bracket of late 20-30 yrs opt for floating rate of interest as they have plenty of time to repay the loan. Floating interest rates are chosen when one perceives that the base rate will either stay constant or will reduce over time. The interest rates applied on your loan will either stay the same or reduce.
Floating interest also allows you to make prepayments incase one has excess income that can help you pay off your loan faster and even reduce the total interest levied on your loan. So, if one expects a potential rise in income in the future, a floating interest works better.
It is possible to shift from Fixed to Floating interest rates and vise-versa. However, while switching you will be levied a nominal charge of 2% of the loan amount.
It is suggested to do a thorough research before deciding on the rate of interest as it will affect your EMI, your financial needs and status.