An interest is the amount due over the period for the amount lent, borrowed or deposited. An interest amount depends on the principal amount, rate, compounding frequency and the time for which the amount is being lent, deposited or borrowed. An extra amount that a lender charges over the principal amount is normally expressed as an annual percentage or the rate of interest.
The financial market is not same for everyone in terms of rate of interest. The lending rates vary from Banks to Banks/NBFC’s. Banks/ NBFC’s charge a higher rate of interest in case of any doubt in the repayment of the loan amount. Also the unsecured loans are assigned with higher rate of interest as compared to the secured ones. Its important to balance the credit score and keep improving it. Higher the credit score the lesser amount the borrower has to pay as an interest.
The rate of interest is determined depending on the kind of the loan : secured or unsecured. While deciding for a floating rate of interest a base rate is decided and informed to the borrower during the approval. The actual rate of interest fluctuates above and below this prime rate. Interest rates are decided by the Banks/NBFC’s on a quarterly basis keeping RBI guidelines in mind.
A Floating Interest Rate is also known as adjustable or a variable rate. This can be applied to any loan which do have a fixed rate of interest. It changes up and down as per the market situation. It can vary during the term of the loan. Generally the floating rate loans costs less than the fixed rate loans. Even if the floating rate goes higher, the borrower does not have to bear it for the entire tenure. Interest rates of the loan are cyclical over the long run and hence have chances to come down over the period of time. In return of paying the lesser amount as an interest, the borrower takes the risk on the interest rate as in future the interest rate can rise up too. It helps in savings in terms of repayments as it depends in which cycle the interest rate cycle of the loan has started.
In Financial Business, the floating rate loan refers to the loan with a floating rate of interest. In a Banking industry or the large size corporate customers, the floating rate loans are very common. Some advantages of floating rate of interest are:
Choosing a floating rate of interest provides an advantage of being benefited from market fluctuations. The market & economic conditions gives the financial freedom. If the market falls the interest rates come down and rise up with the rising market. The risk taken by the borrower is minimal and help in future gains.
The lower interest rates means the lower EMI’s. This in turn helps the borrower to save some part of his monthly income. However, it is a personal choice of an individual to either save or spend the money saved.
As compared to fixed rate of interest loans, floating interest rates are lower. Floating rates of interest ranges from 9.85% to 11.75%. This rate of interest depends on the Bank/NBFC applied and this can result in saving some considerable amount. Due to lower interest rates other charges also gets lowered.
If one is not predicting an unfavorable market in near future it is always better to choose a floating rate of interest option while availing a loan. For a short term loan, it is advised to opt for a floating rate over fixed rate of interest as there are likely less chances of sudden variation within few quarters. It necessary to make a thorough check about the lender. There might be certain terms and conditions that can affect your list of benefits. Floating rates of interest are calculated on the current market situations and the Marginal Cost of Funds.
Type of interest also depends on the type of loan you opt for. In case you have plans to make part payments for the early closure, it is advisable to choose for a floating rate of interest. If the loan tenure is very short, may be up to 5 years, choosing a floating rate of interest can prove to be a wise decision. In case of a longer tenure choosing a fixed rate of interest will be advisable.
Due to floating interest rates, fluctuating interest rates will not be affected in case of sufficient monthly income. The interest flow on the loan amount will be reduced and it will easier to repay the loan on an earlier date. Though the difference of EMI’s will not be easily visible but the amount to be paid will be huge. Just don’t judge the interest rates by its percentage difference, the actual amount may vary with something that you can afford in a month. Considering all the above advantages, choosing between fixed and floating rate of interest completely depends on the borrower.