When taking a personal loan, it is important to choose between fixed and floating interest rates. Fixed rates offer stability in EMIs, while floating rates vary according to the market, leading to potential savings. As per the new RBI guidelines, loan borrowers can now switch between these rates, giving them more flexibility.
Fixed vs Floating Interest Rates: Choosing an interest rate while taking a personal loan is an important decision that can affect your financial future. There are two types of interest rates: fixed and floating. People are often confused about the difference between the two, their advantages and disadvantages, and which option may be suitable for you. If you also have any such confusion, then let us clear it.
Fixed interest rate is one that remains the same throughout the loan period. This means that your monthly EMI (equated monthly installment) will not change till the end of the loan period, whether the interest rates in the market rise or fall. This option is suitable for those who want stability in their monthly budget and want to avoid a possible increase in interest rates in the future. However, fixed interest rates are usually 1.5 to 2 percent higher than floating rates. Also, even if the interest rates in the market fall, there will be no reduction in your EMI.
Floating interest rates?
On the other hand, floating interest rates change from time to time depending on market conditions. These rates are linked to a benchmark, such as a bank’s repo rate or the RBI’s repo rate. If the benchmark rate increases, your interest rate and EMI will also increase. And if it decreases, the EMI may decrease. The main advantage of floating rates is that they can be lower than fixed rates, allowing you to save on total interest payments. However, their uncertainty can make planning your monthly budget a bit challenging.
RBI said- loan takers will be able to switch
The Reserve Bank of India (RBI) has recently clarified that loan takers will get the option to change the type of interest rate. Under the new guidelines, banks and financial institutions are obliged to provide borrowers with the option to switch between fixed and floating rates when resetting loan terms. This change will give consumers more control over their loan terms and help reduce the impact of fluctuations in interest rates.
Which one is right for you?
Choosing between fixed and floating interest rates depends on your financial goals, risk tolerance and market conditions. If you want stability and predictable EMIs, a fixed interest rate may be suitable. On the other hand, if you want to take advantage of a possible reduction in interest rates as per market conditions and are willing to take risks, a floating interest rate may be a better option. It is important to consider your financial position, risk tolerance and future plans before making a decision.
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