Understanding fixed and floating interest rates on loans

Read on to know about the different types of interest rates applied on loans. Know all about fixed and floating interest rates.
Understanding fixed and floating interest rates on loans
5 min read
26 July 2023

Interest rates play a crucial role in the world of finance, impacting various aspects of our lives, from the effect of debt repayment on monthly expenses to investing and saving for the future.

When speaking about loans, one may often come across different types of interest rates. The most common ones are fixed and floating interest rates. Each type has its characteristics and implications and understanding them can help individuals make informed financial decisions tailored to their needs.

Understanding fixed and floating interest rates:

1.Fixed interest rate

A fixed interest rate remains constant over the entire term of the loan. Regardless of changes in market conditions, or economic fluctuations the interest rate on the borrowed loan amount remains unchanged. This predictability provides borrowers with a sense of security, as they will end up repaying a fixed amount at the end of the loan tenure. The total repayment amount is defined at the time of loan application, and it remains unchanged until the end of the tenure. This makes it easier for borrowers to plan their loan finances with ease.

The stability of fixed personal loan interest rates makes them suitable for borrowers who may want to lock in a favourable rate to maintain consistent payments.

2. Floating interest rate:

Floating interest rates are also known as variable interest rates. Unlike fixed interest rates, floating rates are not set in stone. They fluctuate periodically, usually in line with a benchmark interest rate, economic situation, and the central bank advisory.

Changes in the benchmark rate may lead to corresponding changes in the floating interest rate. When market interest rates are low, borrowers with floating interest rates can take advantage of paying lower interest on their loans. This flexibility can be beneficial when rates are expected to stay low. Additionally, initial rates on floating-rate loans may be lower than fixed rates.

Floating interest rates come with inherent risks. As market conditions change, interest rates can rise, leading to higher monthly payments for borrowers. This constant fluctuation means that borrowers must be prepared for uncertainty and have a financial cushion to handle rate hikes. Floating interest rates or variable interest rates are typically seen in long-term lending options like home loans. To take home loans as an example, the EMI amount may remain consistent for a large portion of your loan tenure. But the tenure itself may fluctuate based on the change in the interest rate.

In conclusion, fixed and floating interest rates have their own merits. When taking out a loan, individuals should carefully consider their options and assess their long-term financial capabilities. Comparing different loan offers can be beneficial in navigating the complexities of interest rates and making informed choices tailored to one's specific financial situation. Bajaj Finance Limited offers personal loans with annually fixed interest rates starting at 11% p.a.

Click here to apply for our personal loan at competitive interest rates with minimal documentation.

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