What is the key financial difference between fixed and floating interest rates?

The key financial difference between fixed and floating (also called variable) interest rates lies in predictability and how your repayments change over time. With a fixed interest rate, your EMI stays exactly the same for the entire loan tenure. This makes it easy to plan your monthly budget and gives you peace of mind, since you’re protected from any rise in market rates. Fixed rates are popular with borrowers who value stability and want to avoid surprises. The downside is that fixed rates often start a bit higher than floating rates, and you won’t benefit if market rates drop during your loan period. Some lenders may also switch your fixed rate to floating after a certain period, so always check your agreement.

Floating interest rates, on the other hand, are linked to a benchmark rate—usually set by the lender and influenced by the Reserve Bank of India’s repo rate. If the benchmark rate goes up, your EMI increases. If it goes down, your EMI drops, which can save you money if rates fall. Floating rates can be attractive when market rates are low or expected to decrease. The catch is that your repayments can become unpredictable, making it harder to plan your finances.

In summary:

• Fixed rate: Predictable, stable EMIs, easier budgeting and no benefit if rates fall.
• Floating rate: EMIs can rise or fall, potential savings if rates drop but risk of higher payments if rates increase.

Your choice should align with your comfort with risk, financial goals and the current interest rate outlook in India.