Pros and cons of fixed interest rates
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Pros and cons of fixed interest rates

  • Highlights

  • The merits and demerits of interest rate type depends on the market scenario

  • Fixed interest rates offer safety and facilitate financial planning

  • You could end up paying a high interest rate

  • You may lose an opportunity to benefit from a market dip

There are two types of interest rates, fixed and variable. Each have their own set of merits and demerits, largely dependent on the current financial market scenario. When you want to take a loan, knowing the difference and benefits of each is essential.

Variable interest rates vary as the market interest rate changes. This in turn affects and changes the payments/EMIs to be made. On the other hand, fixed interest rates remain the same throughout the loan tenor, and are unaffected by the changes in the market. As a result, the payments/EMIs remain the same over the entire term.

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Advantages of fixed interest rates

If you’ve been thinking about taking a loan with a fixed interest rate, here’s everything you need to know about its merits:

1. Safe: People often prefer fixed interest rate loans, as they are considered safer. The market is volatile and fluctuates constantly. Fixed interest rates are the safer bet in such a dynamic financial environment.

2. Certainty: Fixed interest rate loans bring with them the blessing of certainty. There’s no need to be anxious about how much you will have to pay, and worry about what’s happening in the market when you have a fixed interest rate.

3. Easier financial planning: The certainty of fixed interest rates makes it easy for you to budget, because you know just how much you need to allocate monthly towards repayment. You can use your remaining financial resources to meet other goals freely.

Disadvantages of fixed interest rates

Where there are pros there are also cons, and here are the demerits of fixed interest rates:

1. Higher rate of interest: Fixed interest rates don’t allow the lender to benefit from your loan when the market rate increases. Therefore, if you opt for loans with fixed interest rates, your interest rate is likely to be high.

2. Missing Out: Opting for fixed interest rate loans instead of variable one means a high probability of missing out on the dip in the market interest rate. While you’re protected from a rise in rates with fixed interest rates, you could also lose an opportunity to save on your interest expenses.

Thus, if the market interest rates are currently low but expected to increase, it’s better to lock your loan at the current (and comparatively lower) fixed interest rate.

Lastly, remember that the time of loan application and its tenor play an important role in determining whether a fixed interest rate loan is better for you or not. Evaluate your individual situation, as well as that of the market, to make an informed decision.

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