All About Fixed Interest Rate


Understanding Fixed Interest Rate

Lending institutions levy a fixed interest rate on liabilities such as loans or mortgages. Here, the interest rate remains constant throughout a loan tenure. Fixed interest rates charged by lenders are slightly higher than floating interest rates (interest rate that varies throughout the tenure).

Fixed interest is charged on the borrowed amount and expressed as a percentage per annum. The repayment amount remains until the end of your tenure. This makes financial planning before applying for a loan easier and more convenient. Therefore, a fixed interest rate is perfect if you want a fixed repayment schedule.

KEY TAKEAWAYS

  • Fixed interest rates stay the same during the entire loan tenure.
  • To calculate a fixed interest rate, you need to consider parameters like loan amount, interest rate, and loan repayment tenure.
  • During a low-interest rate period, borrowers are more likely to opt for fixed interest rates in more numbers.
  • In most cases, fixed interest rates are higher than the current adjustable or floating interest rates.

How Fixed Interest Rates Work?

The interest rate will stay constant irrespective of market fluctuations. As these stay constant, fixed interest rates are usually higher than floating ones. These interest rates remain the same throughout the loan's lifespan.

You may opt for a fixed interest rate if you do not want your loan interest rate to change every month. It will help you maintain uniformity in repayments and manage your finances better.

Banks or NBFCs set the interest rate while keeping in mind factors like the value of the collateral you are pledging, credit score, and loan amount. This interest will be applicable from the day lenders disburse the loan amount to your account.

How to Calculate Fixed Interest Costs

Calculating the repayment amount for a loan with fixed interest is very simple. To compute the fixed interest amount, you must consider three factors:

  • Loan amount
  • Interest rate
  • Tenure

Besides these, lenders analyse your credit score, income source and repayment capacity to decide on a fixed interest rate. Your credit score reflects your efficiency in managing new debt and ongoing ones with income.

With fixed interest rates, you can use the following mathematical formula to calculate your monthly obligations beforehand.

I = [P (1 + R)T] – P

Here, P= Loan amount

R= Fixed interest rate per annum.

N= Number of monthly instalments

T = Total tenure in years

If you find manual calculations challenging, opt for an online EMI calculator. It is a free tool that instantly calculates the EMI and interest amount, leaving no room for error.

Moreover, you can use this tool to calculate and compare EMIs by entering numerous combinations of the required parameters. This will help you compare and decide how much of a loan is suitable for your finances and repayment capacity.

Advantages and Disadvantages of Fixed Interest Rates

To gain detailed knowledge of fixed rates, you should also know their advantages and disadvantages.

Benefits of fixed interest rate

  • Fixed interest rates bring a degree of certainty to borrowers that helps them plan the loan repayment.
  • Even if market conditions change, fixed interest rates stay constant. Thus, the EMI amount will stay the same throughout the tenure.
  • When interest rates are historically low, a fixed interest rate is a great option.

Disadvantages of fixed interest rates

  • Fixed interest rates can be higher than floating interest rates.
  • Refinancing lower interest rates can be tough for fixed interest rate loans.
  • In case the interest rates decline, you would miss out on savings made from floating rates.

Final Word

A fixed interest rate stays constant regardless of market movements during a loan tenure. Banks and NBFCs set this interest rate while sanctioning loans, and it is applicable from the day of loan disbursal. A fixed interest rate allows you to predict how much EMI you must pay every month to clear your debt.

Other Words

  • Floating Interest Rates
  • Flexi Loan

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