Should you opt for Fixed Rate or Floating Rate for Personal Loan?

The choice of personal loan interest rates, fixed or floating interest rate always confuses borrowers, as it directly impacts the amount of EMI payable and repayment tenure.

To get the maximum advantage of a personal loan, one must understand the difference between the two personal loan interest rate structures and how it impacts the repayments.

Therefore, let’s get into detail and know everything about these two terms.

What is a Floating Rate of Interest?

In the personal loan floating interest rate structure, the interest rate changes during the loan repayment tenure as per the repo rate set by the RBI in their periodic revisions.

The lender adds spread (additional interest rate) to the repo rate and determines the interest rate to be charged from borrowers. Any change to the final interest rate is passed on to the borrower and is adjusted with existing interest rates on the personal loan availed.

Benefits

• If the market changes in a certain way, the interest rates may be lower compared to that of fixed interest rate structure
• A cut in interest rate results in savings, as in the EMI composition, the interest factor gets reduced and the principal payment is increased accordingly, which further reduces the future interest outgo

Drawbacks

One of the biggest drawbacks is the unpredictability of the interest rate changes, therefore, it is harder to forecast the future interest expense. In unfavorable market conditions, the interest rates can rise significantly, which can make budgeting more difficult for borrowers.

Must Read: Factors that Affect Your Personal Loan Interest Rate

What is a Fixed Rate of Interest?

In the personal loan fixed interest rate structure, the interest rate during the whole tenure of the loan remains the same, irrespective of the change in repo rate by the RBI. In this structure, the EMI composition (interest + principal) is constant throughout the tenure.

Benefits

• You are protected from the sudden change in interest rates and is safer to choose from in this highly dynamic financial environment
• As the interest component in the EMI doesn’t change during the loan tenure, it provides certainty on how much you have to pay to settle the personal loan
• It helps in efficient financial planning, as fixed payments help to budget properly and use your remaining financial resources to meet other goals efficiently

Drawbacks

• The interest rate is usually higher by 1-2.5%, compared to loans availed with the floating interest rate structure because lenders factor in the possibility of rising interest rates.
• You miss out on the benefits or opportunity to save on interest expenses if there are any cuts in the interest rate

Which one should you opt for a Personal Loan - Floating Rate or Fixed Rate?

You should choose the floating and fixed interest rate structure under the following circumstances:

Floating Interest Rate

1. You understand the financial market well and under which conditions, interest rate drops and rises
2. There are reliable indications that the interest rates with fall in the future and remain stable during the loan tenure
3. If you see a potential increase in income and any rise in interest rates doesn’t affect your other financial commitment

Fixed Interest Rate

1. When you don’t understand or have the market expertise to predict how interest rate moves, the risks associated with changes in the interest rate, and would instead prefer stability.  
2. When you want to keep the EMIs fixed and is comfortable paying the current interest amount 
3. When you foresee a considerable rise in the interest rate due to unfavorable market condition 

Therefore, choosing the interest rate structure should be based on your own knowledge, comfort level, and the advantages that you will receive from choosing a particular interest rate structure. 

If you’re still unsure which interest rate structure to select, you can use the Personal Loan EMI Calculator, and check the EMI amount by using different interest rates and tenure. It is also advisable to seek a discussion with your lender to know more.

Must Read: How to Refinance your Personal Loan at Lower Interest Rates

How to Apply for a Personal Loan?

At SMFG India Credit, you can apply for a personal loan online and get attractive interest rates, starting from 11.99% onwards.

At SMFG India Credit, we offer all borrowers fixed personal loan interest rates which are based on monthly income, nature of employment, credit score, and repayment capability.

To check your eligibility, you can use the personal loan eligibility calculator, which calculates the maximum loan amount you can avail of based on your disposable income, repayment capability, occupation, interest rate and tenure.

Both floating and fixed rates structures have their set of pros and cons. Therefore, while applying for a loan, compare the cost structure under both the rate structures and choose accordingly.