Interest rates are one of the most important factors for a borrower before applying for a loan. Interest rates offered by financial institutions must be taken into consideration before settling for any kind of loan. One must also choose from the two types of interest rates when applying for a loan, these two types of interest rates are, Fixed Interest Rates and Floating Interest Rates. Read till the end to find out all about Fixed Interest Rate Vs. Floating Interest Rate.
Fixed Interest Rate Vs. Floating Interest Rate
It is important to know in detail about Fixed Interest rates and Floating Interest rates before taking loans as it is the most crucial element.
- All About Fixed Interest Rate
A fixed interest rate implies that the borrower will have to pay back the loan in fixed and equal amounts throughout the loan tenure. The fixed interest rate is unaffected by the fluctuations of the market and it provides the borrower with a sense of certainty when it comes to the uncertainty of market conditions. It is especially good for people who plan their budget meticulously as they have to pay a particular installment every month, year after year until the loan tenure ends.
- All About Floating Interest Rate
Floating Interest rate, as the name suggests, changes or fluctuates with the market condition. When a borrower chooses a floating interest rate, he or she has to pay a base interest rate and on top of that, a floating element is added. The base rate is fixed by the lender and is considered the minimum interest rate. The base rate fluctuates along with the floating rate.
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Benefits of Fixed Interest Rates
1. Remains Constant
Fixed interest rates remain unaffected by market fluctuations and remain constant throughout the loan tenure.
2. The EMI Does Not Change
When opting for a Fixed interest rate, you are certain that your monthly EMI will not change every month.
3. Let’s You Plan An Accurate Budget
It helps you plan your budget accurately and it is easy for you to calculate it every month.
4. Best When It Comes To Uncertain Economic Conditions
Fixed interest rates are much safer when it comes to a fluctuating market condition as you know that it is unaffected and free from it.
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Benefits of Floating Interest Rates
1. The Interest Rate Is Much Lower
The interest rate is much lower than fixed interest rates and given the economy is stable, you can save a lot of money on interest in comparison to Fixed Interest rate loans.
2. The Interest Rate Which Has Increased Is Temporary
Sometimes, the interest rate can exceed the fixed interest rate, but such situations are temporary and they will reduce when the economy reaches normalcy.
Conclusion
When going for a loan, you must be extremely careful about the kind of interest rate you are choosing. Fixed Interest rate Vs. Floating Interest rate helps you choose the right one for you depending upon your needs and demands. There is no conclusion of one being better than the other and completely depends on a person’s preferences.
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