Fixed Vs Floating Interest Rates – Which One Is Best For You?
The Indian financial market has a substantial demand for long-term, secured advances like home loans and loans against property. A recent analysis carried out by ICRA showed that the loans against properties comprised of almost Rs. 85,000 Crore, accounting for almost half of all non-banking lending institutions in India. One should carefully consider the difference between the fixed vs floating interest rates and understand their benefits before selecting a particular type.
Loan Against Property – Key Highlights
- 33%– Increase in the total number of loans against property availed in 2018.
- 1.6 million – Total accounts created for these credits.
- Rs. 34.93 Lakh – Average balance held by borrowers in the 3rd quarter of 2018.
These long-term credits often come with several borrower-friendly and flexible policies like the provision to choose between fixed or floating interest rate, repayment tenor, etc. Several financial institutions offer credits like loan against property with fixed or floating rates of interest.
What is a fixed or floating rate of interest?
It is necessary for every borrower to understand the difference between fixed vs floating interest rate before determining which one will be best suited as per their individual repayment capability. Let’s take a look at the different types of interest rates and understand the difference between each of them.
- Fixed-rate of interest –
A fixed interest rate allows a borrower to pay a predetermined rate of interest throughout the loan tenor. It stays unaffected from any market fluctuation during repayment. The rate is calculated when a borrower applies for a credit to a particular financial institution.
Fixed-rate of interest allows a certain degree of stability during the loan’s repayment tenor. An individual looking for a secured option that is independent of the market’s volatility should avail of a fixed rate of interest.
- Floating rate of interest –
Floating interest rate is a better option for borrowers with a high-risk appetite. It is highly dependent on the current financial market, with the base rate being one of the factors that affect the interest rate. The rate of interest is automatically revised every time the base rate is changed, and it can increase, or decrease depending on the market condition.
The floating rate of interest usually stays 1% to 2.5% lower than fixed rates. Non-banking financial institutions like Bajaj Finserv can offer as low as an 8.80% interest rate for their financial products.
Which one is best suited for a borrower?
Both floating and fixed rate of interest comes with its unique benefits. The fixed-rate allows a borrower to plan their finances more effectively for short and medium-term (3-10 years) loan tenors. It also offers a safer option for individuals who want to borrow at a lesser risk.
On the contrary, the floating interest rate is better suitable for longer tenors (20 to 30 years). Financial experts also recommend availing such credits when the market is relatively stable with lesser chances of increase. However, a floating rate of interest might make it difficult for an individual to create an effective budget.
It is important for every borrower to determine whether floating or fixed rate of interest will be a better option when they opt for a loan. Let’s take a look at some situations that might help determine which one will be ideal.
Why go for fixed rates?
There are several reasons why someone might prefer fixed rates over variable ones.
- If a borrower is comfortable paying the current rate of interest and prefers a fixed repayment schedule, then they should avail of a fixed interest rate. However, a borrower should ensure that the monthly installment should not exceed more than 30% of their income.
- Fixed-rate of interest is preferred if a borrower considers that the financial market is likely to experience a significant change in upcoming years. As the interest is independent of market fluctuations, they will not change even if the base rate increases or decreases.
Why go for floating rates?
Individuals with a higher risk tolerance can consider floating interest rates for their loans.
- A borrower can opt for a floating rate of interest if they think the base rate is likely to decrease in upcoming years. It will lower the payable interest and will help save a significant amount of money during repayment.
- Floating interest usually stays 1% to 2% lower than fixed rates. If a borrower considers that the market is unlikely to change during the loan tenor, then they can benefit from the lower rates.
Several financial institutions, including Government-backed lenders and non-banking financial institutions, offer credits at both fixed and floating rates according to a borrower’s requirements. They also provide pre-approved offers that simplify the process of availing a loan and helps save time.
These offers are available on both secured and unsecured credits, including home loans, loan against property, personal loans, business loans, etc. You can check your pre-approved offer by sharing some essential contact details online. Selecting a particular type of interest depends on an individual’s repayment capability, financial condition, and the ability to take risks.