What should you take; a fixed rate or a floating rate personal loan

When it comes to needing money to pay off a big bill in a hurry or going on a vacation that you always dreamed of, a personal loan is generally the answer that most people land at. It is one thing to decide to take a personal loan and quite another to actually find one that suits you the most. There are a lot of things to consider when it comes to taking the loan. The first thing is the

amount that you want to borrow. Then comes the tenure of the loan and finally the interest rate. Even though it has been mentioned at the end, it is no small matter. The interest rate could be one of the most important factors in your personal loan because it will decide part of what your EMI looks like and how much you pay over and above what you borrowed to start with. To calculate personal loan EMI easily with Personal loan EMI Calculator, it is an online financial tool.

Fixed interest rate Vs floating interest rate

To be able to make a decision between these two interest rates, we need to first understand how they work.

Interest rate of floating rate personal loan

The meaning of a floating interest rate is that there is no fixed percentage that is paid as paid as interest. This rate may be decided using the repo rate, the rate at which banks borrow from the RBI, and can go up or down with the repo rate.

Interest rate for fixed rate personal loan

The fixed interest rate has two components, the base rate and the percentage above that, which decides the total interest rate. For example if a bank says that its interest rates on personal loans are 3% to 8% above the base rate and the base rate is 10% then you can expect interest rates to range from 13% per annum to 18% per annum.

Personal Loan Calculator

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What is better?

To understand which of these two rates works best let us look at the advantages/disadvantages of each of these rates.

  • With floating interest rates there is no fixed equated monthly installment that needs to be paid. The EMI can actually change every month and can become rather unpredictable and can go over your budget or even under it.
  • If floating interest rates go up, there is no real gain to be had because the increase may put them at par with fixed interest rates or even beyond them thus increasing the EMI and the total amount that you pay back as interest.
  • In the case of fixed interest rates, when the bank receives your loan application, they will inform you about the interest rate. When the loan is approved and is ready for dispersal, you can negotiate with the bank and have it brought down.
  • Fixed rates also come with a fixed EMI because of the fixed interest rate. This means that you will always know exactly what you will have to pay back every month and the amount is not likely to change throughout the duration of the loan.
  • Fixed rates tend to be higher than floating rate and that is a disadvantage because if you choose a fixed rate and the floating rate for your entire tenure is lower than the fixed rate, you will actually end up paying more.

So what should you choose? The choice is still not a simple one so let’s say that the choice will really come down to what you can afford. If you’re monthly budget allows ample room for movement in the amount that needs to pay as EMI then a floating interest rate could work in your favour. However, if you cannot afford the risk of the unpredictability of the floating interest rate, then it is best to go in for a fixed interest rate as it will ensure you can manage your monthly expenses better.