A Personal Loan can be an amazing financing option to cover planned or emergency expenses. However, you may get confused between fixed-interest-rate and floating-interest-rate. Fixed interest rates provide stability with consistent monthly payments, while loans with floating interest rates adjust to market shifts, resulting in fluctuating monthly payments. Read on to find out how a fixed-interest-rate Personal Loan differs from a floating one.
What is a Fixed Interest Rate?
A fixed-rate Personal Loan comes with a fixed interest rate. This means you have to make fixed monthly payments throughout the loan term. The fixed interest rate helps you streamline budgeting and financial planning.
What is a Floating Interest Rate?
A floating interest-rate Personal Loan fluctuates according to the shifts in market forces throughout the loan term. The Reserve Bank of India (RBI) sets the repo rate, directly impacting the floating rate. Hence, this volatility fluctuates your monthly payments based on economic conditions.
Also Read - The Ultimate Guide to Comparing Personal Loan Interest Rates
Fixed vs Floating Interest Rates: A Comparison
Here are the key differences between fixed and floating interest-rate Personal Loan:
| Points of Distinction |
Fixed Interest Rate Personal Loan | Floating Interest Rate Personal Loan |
| Monthly Payments |
Remains consistent throughout |
Fluctuates based on economic conditions |
| Interest Rates | Fixed | Varies over time |
| Risk and Uncertainty |
Protects against adverse economic conditions, providing a peace of mind |
Carries the risk of interest rate fluctuations, leading to unpredictable financial planning |
| Initial interest rates | Higher |
Lower |
| Savings potential |
Lower savings since the interest rate remains fixed throughout the repayment tenure |
A decrease in interest rates results in lower monthly payments, leading to savings |
Also Read - Which are Best Ways to Reduce Personal Loan Interest Rate?
To Conclude
The choice between a fixed-rate Personal Loan and a Personal Loan with floating interest rates depends on your financial preferences. While fixed-rate loans offer stability and predictable repayments, floating rates provide adaptability to market shifts with the potential for savings. Hence, understanding the benefits, drawbacks and differences of each will help you make an informed financial decision. Explore trusted lending institutions like Poonawalla Fincorp to save more on your monthly EMIs and overall borrowing cost.
