Fixed vs Floating Interest Rate

Fixed vs Floating Interest Rate – how to choose what is good for you ?

Fixed Interest Rate vs Floating Interest Rate

Getting a loan for anything and everything has become quite easy nowadays. However, choosing the best option from a wide array of option has made the process of taking up a loan more complex. It is hence advisable that you do proper homework before rushing into the whole process. The first and foremost thing that will confuse the applicants is about the selection of the type of interest rates.

 

 

Fixed Interest Rate

Fixed Interest Rate means repayment of your loan in fixed and equal instalments over the entire term period of the loan. In other words, it simply means that the interest rates don’t change with market fluctuations. It is perfect for people who want to forecast their incomes and budget it accordingly. Fixed Interest rate gives a feel of security and certainty as well.

The major drawback that is observed with fixed interest rate payment is that they are usually a few percent base point higher than the floating interest rate. Secondly, if floating interest rate due to any reason the fixed interest holders don’t pay at a reduced rate. The borrower has to pay the same rate each time.

It is highly advisable to choose fixed rate if the economic scenario promises a rise in interest rate in the near future.

 

Floating Interest Rate

Interest rates are variable in this type of scheme. The rates are determined based upon the market and they vary accordingly. Floating rates is determined by adding a floating rate to a predetermined base rate.

The biggest benefit with floating rate of interest is that they are usually a lot cheaper than fixed interest rate. The rates can fluctuate and go beyond the fixed rate at certain instances but it won’t be so for the entire tenure. The total interest paid however will be much lesser than the fixed rate.

One of the major drawbacks with floating rate of interest is that as the instalments change every month it is very hard to plan their payment. There is always a chance that the floating rate stays above the fixed interest rate for the majority of the tenure si you might have to pay thousands of extra money.

 

Conclusion

When it comes with choosing between fixed and floating rates of interest. Many seem to prefer floating rates of interest as it is cheaper. Actually, it is up to the borrower to determine the situation and his feasibility with the schemes. If certainty and security is a prime concern then a fixed rate of interest rate would be the best however it won’t come without a premium.

 

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