Choosing between fixed and variable interest rates may seem like a small detail. Especially when you’re applying for a personal loan. But this choice can make a big difference in the total amount you eventually repay.
A fixed interest rate loan has a constant EMI throughout the tenure of the loan. On the other hand a variable interest rate (also known as a floating rate) loan has EMIs that rise or fall. That is because the rate fluctuates according to shifts in the lender's benchmark rate, influenced by market conditions, primarily dictated by the RBI policies.
This article explains the difference between fixed and variable interest rates. You’ll also learn about the advantages of both and what you should choose according to your financial situation.
Why Should You Choose Fixed Interest Rate Loans?
If you like to plan your finances in advance, a fixed interest rate loan can be your go-to choice. Here’s why a lot of borrowers prefer it:
- Predictability – You are clear about how much your EMI will be. This is great for salaried employees or families with a fixed monthly budget.
- Peace of mind – Even when lender’s rates go up, your monthly instalments remain the same.
- Easier planning – You can plan your annual expenses without the hassle of fluctuations.
When Do Fixed Rates Not Work in Your Favour?
While fixed rates provide comfort, they may not always offer the best long-term value. Keep these points in mind before making a choice:
- Limited gain when rates fall – If the RBI lowers the rate then you do not gain anything.
- Moderately higher initial rate – Lenders tend to charge a little extra on fixed-rate loans as they assume the risk of rate fluctuations in the future.
How Variable Interest Rate Loans Work?
Variable (or floating) interest rates can be rewarding also. Here’s what makes them appealing to many borrowers:
- Lower initial rate – Variable rates generally begin lower than fixed rates. Thus, your initial EMIs can be cheaper.
- Enjoy declining rates – If the economy is healthier and the RBI reduces interest rates, your cost of loan could decrease as well.
- Flexibility for long-term borrowers – In a longer span, the fluctuations adds up, benefitting some borrowers.
Things to Watch Out for with Variable Rates
Of course, variable rates come with their share of unpredictability. Before choosing this option, it helps to understand the potential challenges:
- Unpredictable EMIs – You can pay different amounts, which may disturb your monthly budget.
- Increased risk when interest rates go up – You may pay more if the economy has inflation or other cost pressures.
- Challenge in financial planning – Since EMIs could change, it is more difficult to plan a fixed monthly spending plan.
Variable interest rate loans can be ideal for borrowers anticipating the rates to be stable or falling, and who are ready to handle minimal fluctuations in EMI values.
Is Variable Always Risky?
Not necessarily. Over the past decade, interest rates have gone through several cycles. Rates have been rising and falling based on inflation, global conditions and monetary policy. Borrowers who took variable loans when rates were high (and then saw them fall) saved substantially over the loan’s life.
It’s also worth noting that variable interest rate loans are more common in home loans than personal loans because of their longer tenures. But some NBFCs and banks may offer variable-rate personal loans for select customers.
So, if you’re considering one, think of your financial situation: can you handle paying ₹500 or ₹1000 more (or less) each month? If the answer is yes, a variable rate could still be an option worth exploring.
Tips for Choosing the Right Interest Type
This is the way you can make a decision whether to select fixed-rate loan or variable-rate loan:
- Assess your income pattern – If you have constant income, opt for fixed. But if you receive variable income, you can opt for variable. But only if you have enough funds to pay the EMIs if they go up.
- Review your credit score – Higher scores get better deals.
- Track market trends – If interest rates are low, locking them in at the present time could protect you.
- Compare lenders – Even a difference of 0.5% can save you thousands.
- Think about your loan term – For short loans, fixed interest rates give you certainty. For longer loans, floating rates may be better if you anticipate rate reductions over the duration.
Conclusion
Choosing between fixed and variable interest rates isn’t about which is “better” overall—it’s about which is better for you. Compare your options carefully and then take your decision.
Planning to take a personal loan? Visit the website of Shriram Finance and get started today.
FAQs
What is the better interest rate option for long-term loans?
Variable rates tend to be better for long-term loans because they let you take advantage of declining rates down the line. But if stability is more important to you, fixed rates may be the way to go.
How will changes in interest rates impact my loan payments?
If you've chosen for a variable rate, your EMI can increase or decrease based on market fluctuations. With a fixed-rate loan your EMI remains the same.
What are the benefits of a fixed interest rate?
Predictability, peace of mind and simpler budgeting. You know your exact commitment every month.
Can I switch from a fixed to a variable rate later?
Sometimes, but it all depends on your lender. Some lenders allow conversions for a minimal processing charge.
How does my credit score influence my interest rate?
Having a high credit score (typically above 750) allows you to get lower interest rates on personal loans. Whether you go for fixed or floating.
What are the factors that I should look for when selecting an interest rate?
Your risk tolerance, future plans for money, income stability, loan term and projected market trends should all inform your choice.
How to determine the overall cost of a personal loan at varying interest rates?
Use an online EMI calculator. Input the loan amount, term and the kind of interest rate. Compare the overall interest paid for each option.