Planning to borrow a business loan soon? If yes, it’s imperative that you learn about the different interest rates available in the market. It will help you make an informed decision and serve your financial goals better. There are broadly two categories of interest rates – fixed and variable rates.
Let’s dig deeper to understand the difference between the two.
What are fixed interest rates?
As the name suggests, business loan fixed rates remain the same for the entire loan tenure. Say if you take a loan for five years, the interest rate won’t change for the entire duration. With fixed rates, you can plan your EMI burden efficiently and stay assured and confident about future cash outflows.
What are variable interest rates?
On the contrary, business loan variable rates are not fixed and can change during the loan tenure. Typically, variable interest rates imitate the market rates. The lender will bring your interests rate up or down depending upon the market scenario. And your monthly EMI amount will change accordingly. If the interest rates go up, it can affect your budgeting and financial planning.
Additional Read: What are Foreclosure Charges on Business Loan?
Fixed interest rate vs. Variable interest rate
Before deciding whether you should opt for a fixed or variable interest rate on your business finance, it’s best to compare the two in the context of your business objectives.
Since the fixed rate business finance has the same interest rate for the entirety of the borrowing period, you don’t benefit if the market rates go down. With that said, these interest rates are an excellent option when you are availing of long-term business finance. This is because they protect you against the possibility of rising interest rates that can increase your borrowing cost considerably.
In contrast, variable rate business loans are much riskier as they fluctuate according to the market rates. However, considering the risk, lenders usually charge relatively lower rates on variable rate options than fixed-rate options. Hence, if you have a good grasp of market trends and can afford to take the risk, variable interest rates might be a good option for you. After all, these interest rates can help you save a lot of money if the market rates soften over time.
Is there a clear winner?
So, the question remains – which interest rates are better? Unfortunately, there is no obvious winner here. You must select the interest type based on your loan tenure, requirements, risk appetite, and financial conditions. Also, now you have sufficient information on both interest types to make the right decision.
Additional Read: Early Closure of a Business Loan: Pros and Cons
Looking for business finance options?
If you are searching for a reliable business finance lender to grow or start your own venture, Tata Capital is here to help. We offer some of the most competitive business loan interest rates in the market and a hassle-free process to help you acquire the funds quickly.
The best part? You don’t need to go through intense paperwork and formalities and can apply for a loan online. Just head to our official website and go through our loan offerings today!