What is the Difference Between Fixed and Variable Loan Interest Rate?

Benefits of Fixed Interest Rates

Here are some of the beneficial aspects of choosing a fixed interest rate:

• If you choose fixed interest rates, you will not have to worry about market fluctuations. Over the whole loan term, the interest rate remains steady.
• The calculation of the monthly EMI is a key component of loan repayment. To keep the financial planning and monthly budget on track, you must feel at ease with your monthly payments. Your EMI stays the same during the course of the loan because of the fixed interest rate.
• It is easy for you to determine your budget and organise your finances precisely. It is perfect for people who prefer to have a set monthly budget.
• The biggest benefit of a fixed interest rate is that it guarantees that you will continue to benefit from the same interest rate even if economic conditions point to future increases in interest rates.

What is a Floating or Variable Interest Rate?

These interest rates are unpredictable and can continually change in line with shifting market trends. Floating interest rates are determined by the benchmark rate or base rate of a financial institution, which is subject to adjustments on a quarterly or semi-annual basis. The floating rate on your property loan will fluctuate if these base rates change, which are set by the RBI rules.

How Frequently Does a Variable Interest Rate Change?

A variable interest rate fluctuates based on market conditions and benchmark rates. Changes can occur quarterly, semi-annually, or annually, depending on the lender's terms. Unlike a fixed interest rate, variable rates impact monthly payments, making them less predictable but potentially beneficial when rates decrease.

Benefits of Variable Interest Rates

Now that you know what is variable interest rate, let’s look at the advantages of choosing a variable or floating interest rate:

• The main advantage of choosing a variable rate of interest is that lending institutions offer current interest rates than fixed interest rates.
• As the interest rate is variable, there is a potential that it will go down when the market rates drop. Hence, your repayment will become easier, and the total debt will be lower. 

Also Read: How to Find the Best Personal Loan for You  

Key Differences Between Fixed and Floating Interest Rates

Here are the key distinctions between a fixed and variable interest rate:

Rate of interest

It is the most identical difference between the two. If you choose a fixed rate of interest, it will remain the same for the whole loan term, depending on the terms of your loan contract. In contrast, if you choose a variable interest rate, it fluctuates in accordance with market changes.

Low vs high-interest rates

If we compare the two, floating interest rates can be more beneficial for the borrower in the longer run than fixed rates.

Ways to decide

Depending on the state of the market, you can choose between a fixed and fluctuating interest rate. It is preferable to choose a floating interest rate in case you are positive about the state of the market and think that interest rates may decline in the future. On the other hand, if you are convinced by the interest rate offered by the lender, it is better to go with the fixed rate.

Prepayment penalty

Prepayment penalties are typically assessed for fixed-rate loans, although prepayment penalties for floating-rate loans are extremely unlikely. This is influenced by several variables, including the loan's term, whether you choose to prepay the loan, and more.

How Fixed And Variable Interest Rates Work?

Understanding the difference between fixed and variable interest rates helps borrowers choose the best option. While fixed rates offer stability, variable rates adjust with market changes, impacting EMIs.

How Fixed Interest Rates Work?

As the term suggests, a fixed interest rate remains unchanged, offering predictable EMIs throughout the loan tenure. This provides financial certainty, shielding borrowers from interest rate hikes, unlike a variable interest rate, which fluctuates with market trends.

How Variable Interest Rates Work?

A variable interest rate changes based on market conditions, leading to fluctuating EMIs. Unlike a fixed interest rate, it may decrease or increase over time. Borrowers opting for fixed and floating interest rates must consider market trends before choosing their loan type.

Things to Consider When Choosing Between Fixed and Variable Interest Rates

Selecting between fixed and floating interest rates depends on financial stability and market conditions. Understanding key factors helps in making an informed decision.

• Risk Tolerance: A fixed interest rate suits risk-averse borrowers, while a variable interest rate may benefit those comfortable with fluctuations.
• Loan Tenure: Short-term loans often favour variable interest rates, whereas long-term loans may benefit from the stability of a fixed interest rate.
• Current Economic Conditions: When interest rates are low, fixed and floating interest rates should be compared to determine potential savings.
• Financial Goals: When budget stability is crucial, a fixed interest rate is preferable. For flexibility, a variable interest rate might be better.

Conclusion

Hopefully, now you have a clear idea of the differences between fixed and floating interest rates. While applying for a loan, you can perform a comparative analysis and decide which interest rate suits you. While looking for a loan, you can always consider Hero FinCorp. We are committed to providing you value-based innovative products and services. We ensure a hassle-free process with minimal documentation. With Hero FinCorp, you get loans at competitive interest rates.

Frequently Asked Questions

1. What is the main difference between fixed and variable interest rates?

A fixed interest rate remains the same throughout the loan term, while a variable interest rate may change based on market conditions, potentially increasing or decreasing over time.

2. Are fixed-rate loans always more expensive than variable-rate loans?

Fixed-rate loans can sometimes be more expensive upfront due to their stability, but variable-rate loans might cost more if interest rates rise drastically during the loan tenure.

3. Can I switch between fixed and variable interest rates during my loan term?

Some lenders may allow borrowers to switch between fixed and floating interest rates during the loan tenure, but it usually depends on the loan agreement and lender policies.

4. Is a fixed interest rate ideal for long-term loans?

A fixed interest rate is often ideal for long-term loans as it provides predictable payments, protecting borrowers from potential interest rate fluctuations throughout the loan term.

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