Many people don’t pay much attention to details when it comes to loans. All they are concerned is that they should get the required amount and the EMIs should be as low as possible.
But its possible that when you go to take a personal loan, you would be asked to choose between the two types of loans available – a fixed interest loan or a floating interest loan. Though this choice may or may not be available to the loan applicants, you can at least increase your knowledge that might be beneficial for you in the long run.
1 – Fixed Rate Loans
Interest rates for these loans are fixed for the entire tenure of the loan. So if you have take a loan for 5 years, you can rest assured that rate of interest will remain fixed for full period. The best part about these loans is that it brings a lot of certainty about future cash outflows. This in turn helps in proper planning of your personal finances.
But remember one thing. This increased stability in rates comes at a cost. These loans generally cost 2-3% more than prevailing floating rate loans.
2 – Floating Rate Loans
These loans have interest rates that can change in future due to various factors. The rates are governed by the policy rates declared by the government. So as and when the rates increase, the interest rates applicable in floating rate loan also increase and vice versa. Now this change in rates can have two effects. It can either increase or decrease your EMI (keeping the tenure fixed). Or it can increase or decrease your loan tenure (keeping the EMI fixed).
The biggest benefit of a floating rate loan is that it is cheaper than a fixed rate loan by about 2 to 3%. These can save you a lot of money if the rates soften after you take the loan.