Wondering if you should get a loan at floating interest rates? Before finalizing, it becomes imperative to know how it functions and the advantages and disadvantages present. This will help you make the best decisions regarding it. Go through this guide to learn what are floating interest rates, weigh the pros and cons, and understand the mechanics behind it.
A floating interest rate is an interest rate that fluctuates based on prevailing conditions in the market. Factors like market conditions and benchmarks influence how much borrowers will pay as EMI to repay the credit.
Borrowers with a floating interest rate have different monthly payments and overall costs throughout their loan or mortgage. Understanding the loan agreement terms is important to know when and how the interest rate can change.
When you opt for a loan with a floating interest rate, the interest percentage is typically tied to a benchmark rate, such as the prime rate. The interest rate on the loan or investment will vary periodically, often about changes in the benchmark rate. This means that as the benchmark rate changes, your interest rate will adjust accordingly, resulting in fluctuations in your payment amounts or investment returns.
To calculate a floating interest rate, you must consider the financial product and the benchmark rate. The formula for floating interest rate calculation is straightforward:
The spread is an extra amount added to the benchmark rate, determining the final interest rate. For instance, if the benchmark rate is at 3%, and the spread is 2%, the floating interest rate becomes 5% (3% + 2%).
The following table provides a brief overview of the difference between floating interest rates and flexible interest rates:
Floating Interest Rate
Fixed Interest Rate
Changes over time
Unpredictable and may change based on market conditions
Offers more predictability for borrowers or investors as they know exactly what their payments or returns will be throughout the loan tenure.
Does not carry prepayment penalties
Carry prepayment penalties if the borrower pays off the loan before the end of the term.
Choosing between a floating and fixed interest rate depends on your financial situation and views on interest rates or the economy. While a floating rate might save you money, it can complicate your financial planning as it fluctuates. It potentially leads to higher expenses and carries a risk. On the other hand, a fixed rate stays constant. It allows you to plan with confidence and feel more secure, especially in cases when the interest rate rises.
A floating interest rate offers several advantages. Let's explore them below:
Yes, most credit cards come with floating, or variable rates. These rates usually change based on the prime rate. The credit card company then adds a certain percentage to set the card's interest rate. For instance, if the prime rate is 8% and the additional amount is 12%, the credit card rate becomes 20%.
Follow the steps mentioned below to apply for a loan online:
Thus, opting for floating interest rates presents borrowers with a dynamic and often attractive alternative compared to fixed interest rates. It is crucial to thoroughly research and compare offers from different lenders to find the best interest rates that fit your financial situation. Once you have decided on the interest rate type, get a loan from Poonawalla Fincorp and fulfil all your monetary needs.
1. What is the floating rate of interest?
A floating rate of interest is an interest rate that changes over time based on market conditions. For example, if you have a mortgage with a floating interest rate tied to the prime rate, as the prime rate changes, your mortgage interest rate will adjust accordingly.
2. Are floating rate funds risky?
Floating-rate funds can be considered riskier compared to fixed-rate funds. They are more sensitive to changes in interest rates and may experience volatility in returns. However, they can also provide potential opportunities for higher returns in certain market conditions.
3. How frequently does the floating interest rate change?
The floating interest rate is usually revised every quarter. This rate is determined by the RBI based on various economic factors. Thus, with a variation in the interest rate, the EMI for the quarter also changes.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply
The cyber city of Gurgaon, now known as Gurugram, has developed into a financial, technology and industrial hub. It holds the distinction of having Indias third-highest per capita income.
Collateral-free loan refers to any loan that does not require any asset, security deposit or the backing of a guarantor. These are also called unsecured loans.
If you have a CIBIL score of 750 and above, the chances of getting a loan at an attractive interest rate are higher. The CIBIL credit score is usually a value between 300 and 900.
Most people prefer buying a second-hand or used car after they turn 18 and obtain a driving license. The justification is that it is good to buy a new car after honing oneâ€™s driving skills on a used car.
Loans have made our lives easier and simpler. From home loans to car loans to business loans, many types of loans are available in the market to cater to your different needs.