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Compare fixed interest rate and floating interest rate
Let us learn about the fixed interest rate and floating interest rate before understanding the differences between them.
Fixed interest rate
In fixed interest rate the lending rate is fixed. In fixed interest rate loan tenure and months installment are known before. Switching of fixed rates to floating rate (a few years) is called reset.
Fixed interest rate is ideal when you want to pay fixed EMI and to meet deadlines without any difficulties. With fixed interest rates, people can plan their finances better and it helps in eliminating/decreasing market risk associated with interest rates. The main advantage of fixed interest rate is interest rate will not change irrespective of fluctuations or trends or market conditions.
Benefits
- Ideal protection against volatile conditions.
- For long term budgeting, it is an ideal option.
- In terms of security and certainty, it helps in long term planning.
Floating interest rate
In this interest rates are revised every quarter based on base rate. This rate is determined by the Reserve Bank of India (RBI) based on various economic factors. With change in base rate, interest rates also change. It will not affect EMI but it varies tenor of floating interest loan.
If you think the base rate will remain the same or may reduce in coming quarters then floating interest rate is best suitable. By making prepayments with additional income, it pays off loans faster and reduces the total interest levied on loan.
Floating interest may work better, if there is potential raise in income in future. Floating rates are comparatively cheaper than fixed interest rates and these are volatile. With floating interest rate planning financials may be difficult
Benefits
- Lower than fixed interest rate.
- Raise in floating interest rate is for only a short duration.
- Repayment duration is shorter.
Differences
The major differences between fixed interest rate and floating interest rate are as follows−
| Sr.No | Fixed interest rate | Floating interest rate |
|---|---|---|
| 1 | Interest rates are high. | Interest rates are low. |
| 2 | Financial market conditions have no impact on this interest rate. | Financial market conditions have an effect on floating interest rates. |
| 3 | Equated Monthly Installments (EMIs) are fixed. | Equated Monthly Installments (EMIs) changes with interest rates. |
| 4 | Possible budget planning. | Managing finances is difficult. |
| 5 | It has security. | It is applicable for the savings. |
| 6 | It is suitable for short and medium terms. | It is suitable for longer terms. |
| 7 | It has less risk as compared to floating interest rate. | It has high risk as compared to fixed interest rate. |
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