Fixed vs Floating interest rate - Fusion - WeRindia

There are two kinds of interest rates calculated on most of the retail loans like a home loan, car loan or an education loan, fixed interest rate and floating interest rate.

Often borrowers get confused about choosing between them. Before opting for one of them, you have to know about some important things about them.

Fixed interest rate will remain unchanged throughout a specific period. This period can be for a few years or the entire tenure of the home loan based on the contract.

As the interest rate will not be changed for the tenure, you can get an idea in advance on the interest amount you are paying for the loan. Your EMIs have been decided accordingly and thus, you can estimate the required budget for the repayment of the loan.

Unlike the fixed interest rate, the floating interest rate will fluctuate throughout the loan tenure. The rate moves upwards or downwards based on the marginal cost of funds-based lending rate (MCLR) set by the bank. It also depends on RBI’s repo rate, economic conditions of the country etc.

However, compared to fixed rate, floating interest is lower. And overall, borrowers will pay a lower interest in the complete term of loan than fixed interest rate.

If you want to know your EMIs well in advance and see no fall in the interest rate, you may choose a fixed rate.

On the other hand, if you anticipate a fall in the interest rate in future, you can choose a floating interest rate.

Fixed interest rate is ideal for salaried employees with proposed EMIs which come to less than 30 per cent of their monthly salary.

Furthermore, it is difficult to predict when would banks revise their MCLR. So, if you are not an expert in calculating interest rate fluctuations, it is better to opt for a fixed interest rate.

Some banks follow a hybrid system where both fixed as well floating interest is set for a specific period. However, read the terms and conditions of the bank carefully while proceeding for a loan.

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