What is the financial impact of choosing a variable interest rate vs. fixed?

The financial impact of choosing a variable interest rate versus a fixed rate for your personal loan depends on your goals, risk tolerance, and the current economic climate in India in 2025.

Variable interest rates are linked to a benchmark, like the RBI’s repo rate. When market rates are low, your EMIs can be lower than with a fixed rate, saving you money in the short term. But if the benchmark rises, your EMI and total repayment can increase. This makes budgeting less predictable and could strain your finances if rates rise sharply, as has happened in 2025 with the RBI maintaining higher rates due to inflation. Lenders typically review and adjust variable rates every quarter or six months, so your payments can change multiple times during your loan tenure.

Fixed interest rates give you certainty. Your EMI stays the same throughout the loan, making it easy to plan your monthly budget. You’re protected from any sudden hikes in market rates. The trade-off is that fixed rates are usually 1.5% to 2% higher than floating rates at the time you take the loan. If market rates fall, you won’t benefit from lower payments.

Consider these points:

• Fixed rates are better for those who value predictability and want to avoid surprises.
• Variable rates suit borrowers comfortable with some risk and who want to benefit if rates drop.
• The RBI now allows borrowers to switch between fixed and floating rates at reset periods, offering more flexibility.

Always read the loan terms carefully, compare offers and then choose the option that fits your financial situation and comfort with risk.