Fixed vs Floating Interest Rate: Benefits, Risks, and Key Differences

Interest rates play a vital role in financing planning, especially when considering loans for commercial property in rajkot. There are two types of interest rates, fixed vs floating interest rate, that affect long-term financial duties.

You should understand the difference between the fixed and floating interest rates to avail the loan and invest in the real estate market in India. This blog will tell you about what a fixed interest rate is, what a floating interest rate is, with benefits, risks, and key differences.

What is a Fixed Interest Rate?

The fixed interest rate is the interest rate that remains unchanged for the duration of the loan or a specific period. With this interest rate, the borrower knows exactly how much they are required to pay every month because the interest rates do not change with market conditions.

This type of interest rate gives you more stability in loan repayments and makes it easier for borrowers to invest in property for sale in Rajkot. It is preferred for long-term loans or when the interest rate is expected to increase in the future. The fixed interest rate offers you protection against potential interest rates and gives you peace of mind.

Advantages of a Fixed Interest Rate 

A fixed interest rate is beneficial for borrowers. Here is a quick overview of some of its key benefits. 

• Budgeting and financial management are much easier with a fixed interest rate since borrowers can predict their monthly payments. 

• Borrowers are protected from rate increases because fixed interest rates remain constant throughout the loan term. 

• Fixed-interest-rate loans are straightforward and less complex than floating interest-rate loans. 

Disadvantages of a Fixed Interest Rate 

Despite the benefits of a fixed rate, there are some drawbacks that borrowers need to be aware of. Let’s go through some key disadvantages of this type of interest rate. 

• Financial institutions often set fixed interest rates higher than floating interest rates for most types of loans. 

• Borrowers will not benefit from rate decreases since fixed interest rates do not change during the loan period. 

What is a Floating Interest Rate?

The floating interest rate is called an adjustable interest rate, which can fluctuate during the loan term. This interest rate is tied to a reference rate, such as a benchmark interest rate or an index. It means that the borrower's monthly payments vary in the loan term.

This kind of interest rate gives the savings potential to borrowers when the interest rate decreases. It is used in loans with shorter terms or when interest rates are likely to decrease in the future.

Advantages of Floating Interest Rate 

Taking a home loan with a floating interest rate offers many benefits, such as 

1. Lower Initial Rates 

A floating interest rate is usually more affordable than a fixed rate. There is often a noticeable cost difference between a home loan with a fixed rate and the same loan with a floating rate, even from the same lender. 

2. Potential for Reduced Payment 

Since floating interest rates depend on market conditions, if rates fall, you can make lower interest payments. This may decrease the total cost of the loan. 

3. Repayment Flexibility

Floating interest rates often allow for extra benefits, like partial prepayments or no foreclosure charges, depending on the lender, giving you more control and financial freedom. 

Disadvantages of Floating Interest Rates 

While floating interest rates offer many benefits, they also have some drawbacks. It’s important to understand them well. 

1. Budget Pressure 

A floating interest rate carries risk when rates increase, as it raises your monthly payments. This can put extra pressure on your budget and make it hard to cover additional expenses or save money. 

2. Planning Issues 

Since floating rates can change frequently, it may be tough to plan your finances for the future. It disrupts your long-term goals or savings plans, especially if there's a sudden interest rate change. 

3. Unpredictable Costs 

Floating interest rates aren’t fixed; they change according to market conditions. Your loan payments may rise or fall, making it hard to predict future financial plans. 

When to Opt for a Fixed Interest Rate? 

• You are comfortable with the EMIs you’ve agreed to pay each month. Ideally, the monthly installment does not exceed 20%-30% of your monthly income. 

• You do not have to worry about market conditions, as the rate is not influenced by outside factors. 

When to Opt for a Floating Interest Rate? 

• If you expect interest rates on a home loan to fall in the coming months, you can choose a floating rate to take advantage of lower rates and reduce the total cost of the loan. 

• Floating-rate loans usually have no prepayment penalty. For example, if you receive a festive bonus or incentive, you can use it to prepay the loan with no penalty. 

Key Differences: Fixed vs Floating Interest Rate 

Here is the table on fixed vs floating interest rates to understand the differences between them

Conclusion

Both fixed and floating interest rates have their benefits and drawbacks, which are suitable in different situations. Your choice depends on your financial situation, comfort with risk, and other factors. 

By carefully evaluating both rates, you can manage your finances according to market conditions. Fixed rates provide stability and predictability, while lower initial rates characterize floating rates.

Read Also: Is Buying a Flat a Good Investment?

FAQs

Q1. Do Banks Charge a High Fixed Interest Rate for a Personal Loan?

Ans: Yes, banks charge a high fixed interest rate for personal loans, because these loans give you more financial stability.

Q2. How Often Do Floating Interest Rates Change?

Ans: The floating interest rate changes every 3 to 6 months. The variation will depend on the factors like lender policies and market conditions.

Q3. Which is Better, Fixed or Float Interest Rate for Long Term Loan?

Ans: If you are applying for a long-term loan to invest in property for sale in Rajkot, then it is suggested to go for a floating interest rate. It led to major savings for you.

Q4. Do Lenders Offer Fixed and Floating Interest Rates?

Ans: No, every lender does not provide both fixed and floating interest rates. It is suggested to check with the interest rates options offered by the lender before applying for a loan.

Q5. Can I Change From a Fixed to a Floating Interest Rate During the Loan Tenures?

Ans: Yes, you can change from a fixed to a floating interest rate during tenure. But it incurs additional charges or processing fees.