Floating Interest Rates Vs Fixed Interest Rate

Published on: 25 May 2023

Deciding between fixed and floating interest rates is crucial as it affects the amount you have to pay as EMIs. So, where you do stand in the fixed rate vs floating rate debate? Confused about why this matters? Choosing the right type of interest rate allows you to save more on interest payments. 

In any discussion about fixed interest vs floating interest rates, you first need to understand them. To find out the difference between fixed interest rates and floating interest rates, read further. 

What is a floating interest rate?

A floating interest rate depends on a benchmark rate set by the lender. The EMIs towards your loan repayment change accordingly. Simply put, a floating interest rate varies as per market fluctuations.

The lenders set a period after which they revise the rate of interest on your loan. The lender can change these rates annually, half-yearly or quarterly. Note that the EMI amount that you pay monthly remains the same. The lender only alters the tenure according to the changing benchmark rate. 

Benefits of floating interest rates

If you decide to go with the floating interest rates, you get to enjoy the following benefits:  

• Floating rates are generally lower than the fixed rates. Due to this, you stand to save on your total cost of borrowing.
• If the lender makes a downward revision to the benchmark rate, you stand to gain from the reduced interest payments and shorter loan tenure. 

Drawbacks of floating interest rates

There are also certain disadvantages when you choose a loan with floating interest rates. These include: 

• As the interest rate fluctuates according to market conditions, this lending option is considered unstable.
• In a low-inflationary market, the floating interest rates can remain high for a long time. This can burn a hole in your pocket.

What is a fixed interest rate?

As its name suggests, a fixed interest rate is fixed at the time of your loan agreement. Here, the rate of interest on your loan remains unchanged throughout your repayment duration.  However, lenders generally peg it at 1%-2% higher than the prevailing benchmark rates. 

As opposed to floating interest rates, you can not avail yourself of reduced interest payments when the repo rate lowers. However, it provides you with a sense of certainty as your EMI amount also remains unchanged through the repayment tenure. 

Benefits of fixed interest rates

When you choose a loan with a fixed interest rate, these are the benefits that you enjoy:

• Fixed interest rate offers predictability and certainty about the EMI amount that you need to pay to service the loan
• Fixed interest rates become a more viable option when the repo rate is low
• This type of interest also allows you to calculate the overall cost of your borrowing with ease

Drawbacks of fixed interest rates

Similar to floating interest rates, fixed interest rates have some drawbacks:

• As opposed to the floating interest rates, you do not benefit even if the repo rate lowers.
• A fixed interest rate is generally higher in comparison to floating interest rates.

At Fibe, you can get an instant personal loan up to Rs.5 Lakh at fixed rates. You can pay off the loan early and become debt-free faster without any prepayment charges. To access easy credit, simply download our Personal Loan App from the App Store or Google Play. 

FAQs about fixed vs floating interest rates

Which is better among fixed vs floating interest rates?

It depends on you to decide which is better between fixed vs floating interest rates. If you are looking for stability, a fixed interest rate is the perfect option for you. However, if security is not your prime consideration, you can go with the floating interest rate. If the benchmark rates remain low, you can end up saving considerably on interest payments.  

Do market conditions affect fixed and floating interest rates?

The RBI periodically revises the repo rate based on market conditions. While the revised rates affect the floating interest rates, it bears no effect on the fixed rates. 

Can I switch from a fixed interest rate to a floating interest rate?

Yes, some lenders offer the facility to shift to the floating interest rate after paying a certain number of EMIs.

How do the floating interest rates work?

Repo rates and floating interest rates are directly related. When the repo rate goes up, the floating interest rates also spike, and vice versa.

Is a floating interest rate a good option?

A floating interest rate is an attractive option if you wish to save on interest payments. You may benefit if the lender lowers the benchmark rate shortly.