How does interest rate variability affect long-term costs?

Interest rate variability plays a very important role in determining the overall expense of your personal loan throughout its duration. When you choose to opt for a personal loan, you encounter two primary interest rate structures: fixed and floating rates, each carrying distinct implications for your long-term financial commitment.

Your monthly EMI will remain constant because fixed interest rates don't change over the course of your loan. Because you know exactly how much you need to set aside each month, this stability makes it possible to plan your finances and create a precise budget. On the other hand, the Reserve Bank of India's benchmark rates and market conditions determine how much floating interest rates change.

When you choose a floating rate option, your EMI can vary significantly during the loan tenure. If market rates increase then your monthly payment rises potentially straining your budget and increasing the total interest paid over the loan period. For example: a 3% rate increase on a ₹5 lakh loan can result in additional interest payments of approximately ₹45,400 over five years.
Floating rate borrowers profit from lower total interest costs and EMIs when rates fall. This unpredictability necessitates adaptable financial planning and the capacity to manage variations in payments.

Your choice between fixed or floating rates should align with your risk tolerance, market expectations and financial stability. Conservative borrowers who prioritise predictable payments typically favour fixed rates whilst those comfortable with uncertainty and expecting rate declines might prefer floating options. Consider your income stability as well as ability to absorb potential payment increases before making this decision.