With the change in the lifestyle of our society, there is always a need to fulfill one or other desire to live a comfortable and easy go life. To meet these requirements of an individual, the finance and banking industry has evolved a lot.
There are several kinds of loan that are available in the market. These options have one or the other benefit over the other. At this scenario, it become a little complex to choose the best option that suit you better in a long term.
Keeping all the important considerations in mind, this write up is written to bring out the relevant differences and benefits of opting one among the two types of rate of interest currently existing in the market.
The two most talked types of rate of interest in the market are Floating and Fixed Rate of interest. We will explain all the relevant details of the two, so that taking a decision while choosing your loan will not be a complex task for you.
Overview of Floating Rate of Interest
As the name suggests, in such type of loan, the rate of interest keeps on varying according to the market conditions. It means the interest rate will be a variable and will keep on moving up and down, with respect to the rest of the market. It also keeps on varying according to the duration and term for which it is taken.
As compared to the other rate of interest, floating rate of interest starts with a lower introductory interest rate. They are comparatively cost- effective as compared to the fixed rate of interest.
In conditions, where there will be an increase in the floating rate of interest because of market shift, then also, the increase will not be permanent. It will keep on fluctuating and optimum benefits could be entertained with it.
This can serve as a huge saving for you, in cases when the rate of interest become very low. Hence, it can surely bring a big savings for you too.
With all these premium benefits of opting floating rate of interest, there are few of the drawbacks that also come with it.
If you opt for floating rate of interest for an amount of loan, then you will likely be not knowing the exact amount of your next monthly installment until the statement is generated. It is so because, there is no fixed amount that you have to pay.
Your amount will keep on vary every month. Hence, it brings uncertainty in your monthly expenditure.
Moving ahead, now we will discuss about fixed rate of interest and its salient features.
Overview of Fixed rate of interest
This is one of the most common type of rate of interest that is commonly opted by many of us. It includes the repayment of the monthly installments for a loan at a fixed rate of interest.
For the complete duration of the loan, the amount of monthly loan installment will remain same and it remains unaffected with the market movement.
Hence, you are well aware in advance about the monthly payment of loan installment through out the tenure. The main benefit of choosing it over floating rate of interest is that irrespective of market ups and down, your rate of interest will remain the same.
You need not to worry about the reshuffling of your monthly budget as you are aware of exact amount, you need to pay as your loan monthly installment.
This will help in adding the certainty as well as security to your monthly budget.
However, the drawback of choosing fixed rate of interest is that it will not help you in bringing more savings to your account. Unlike in Floating rate of interest, the amount of monthly installment will never lower down.
As now, you have a brief introduction about the two types of rate of interest that are available in the market. The next big question arises which one is better over the other?
Let’s talk about them step to step. Imagine you have taken a loan of “x” amount from a bank. And if you opt for a fixed rate of interest plan, then you will be end up paying “y” amount of monthly installment every month. This will continue till the repayment of your whole loan amount.
On the other hand, for the same “x” amount of loan, if you opt for floating rate of interest, the monthly installment amount will keep on changing. There is no fixed amount that will make your monthly installment.
This is so because, the rate of interest in floating option, is a dependent variable on the market trends. As soon as the market rises or falls, the rate of interest on your principal loan amount will keep on changing.
Talking about the benefits and drawback of one over the other, in case of fixed rate of interest, the loan payer is well in advance aware of the amount of monthly installment, he or she is going to pay. This will help him in taking out the amount in the advance and it helps in sorting out his monthly expenses.
However, in case of floating rate of interest, an individual never gets to know about the amount of the installment, till the statement is generated. The changes and shifting in the market, will determine the rate of interest that will be imposed on your principal loan amount.
So, if you are smart enough to deal with uncertainty in the amount of your monthly installment, you can go for floating rate of interest option and if you are comfortable in paying a fixed amount only, then the choice for fixed rate of interest is appropriate for you.
Apart from the certainty quotient, the next important aspect that should be counted is the profit. Imagine if all goes well, the floating rate of interest will be comparatively low as compared to the fixed rate of interest. Hence, you can add more savings to your bank balance with the floating rate of interest.
All these factors determine which type of loan rate of interest is specifically beneficial for you. The end decision should always be in your hand as ultimately you are the one, who will be paying the installments.
It is always better to look after all the parameters and then take a precise decision over which type of rate of interest- Floating or fixed will suits you.