DIFFERENCE B/W FIXED & FLOATING RATE OF INTEREST
The major difference between Fixed and Floating Rate of Interest is that EMI would remain constant in Fixed Rate of Interest while the EMI will fluctuate according to the market interest rates in Floating Rate of Interest. Read this article for deep knowledge between the two types of Interest rates:
Fixed rate of Interest
Fixed Interest Rate allows the repayment in fixed equal monthly instalments over the entire period of the loan. In fixed rate of interest, the percentage of interest is fixed for whole tenure and same percentage of interest is charged throughout the loan. It makes the EMI payable at a constant sum throughout the tenure. This implies that the home loan interest rate will be fixed and you will need to pay fixed equal instalments over the repayment tenure of the loan. Since the rate remains fixed, you know how much interest charges you’re paying upfront. The main highlight of this type of interest rate is that it is unaffected by market fluctuations. Your loan will be shielded from frequent rate fluctuations and saves money in a longer run if there is a hike in lending rates. It is always recommended that you opt fixed rate of interest only when the rates are bottom down and if an upward trend is expected.
- It gives a sense of certainty to the borrower and the lender. It is free from risk and allows the lender to get regular repayments.
- It is easy to keep a track of your cash flows and both the parties have complete and accurate information about the loan.
Floating rate of Interest
Floating Interest Rate which is also referred to as Variable or Adjustable Interest Rate is any debt instrument that does not have a fixed interest rate. The most visible perk of opting for the floating rate is that you have the advantage of being billed on the basis of the latest rate. If the rates fall, you save on interest charges. Floating interest rate applied on housing loans changes with the market conditions. If you opt for a home loan with a floating interest rate, it means that you will be subjected to a base rate and a floating element will be added. The interest rates for home loans on floating interest are calculated according to a base rate plus a floating rate. So, whenever the base rate changes the floating interest rate gets changed with it.
- Floating Interest Rate is around 1-3% lower than the Fixed Interest Rate. This percentage means a lot. Even if the rate rises above the fixed rate it is bound to get reduced by the time you pay your next instalment.
- It provides you with an option to earn well, as per the market conditions. You can give out a loan at fixed interest rate and pay your own loan at a floating rate.