Fixed Interest Rates or Floating Interest Rates? What’s Best for Your Personal Loan?

Sandip Makavana
Jul 22
3 min read

Updated: Aug 20

When you go for a personal loan, you are always provided with two interest rate options. Fixed interest rate and floating interest rate. Since you need to repay your personal loan, you need to choose wisely between the two. Financial institutions give you a benefit where you can choose what can help you save money for your financial stability.

Choosing your interest rate can help you manage your finances well and reach to your financial milestone earlier than you can ever predict! Hence, this blog will give you some important highlights on fixed and floating interest rates.

Understanding Fixed Interest Rates

Definition: The loans that come with a fixed interest rate that is not affected by any market factor are called fixed interest rates. The fixed rate is generally 1% to 2% higher than the current floating interest rate.

Because the rate is fixed over the time of your repayment period, you can predict your monthly budget and manage your finances accordingly. Hence, it also gives you a sense of security and good mental health.

When Should You Consider a Fixed Interest Rate?

If you are looking for non-changing EMIs, and also comfortable with paying a little higher than the floating rate, then you should go for a fixed interest rate. With a fixed rate, your financials can be planned better with fixed EMIs.

Pros of Fixed Interest Rate

Regardless of market conditions, fixed interest stays fixed all the time.
Your EMI stays the same throughout the repayment tenure.
Fixed-rate loans are great, especially if you want a home loan.
It provides you with a sense of security.

Cons of Fixed Interest Rate

Fixed rates are 1% to 2% higher than floating rates.
You have a higher chance of missing the saving opportunities you would have gotten if you had chosen floating interest rates when rates hit bottom because of market fluctuations.
The fixed-rate loans often charge you penalties when prepaid. Hence, it constrains you from reaching peace of mind by paying off the debt earlier.

Understanding Floating Interest Rates

Definition: A floating interest rate is defined as the interest rate applicable to your loan, which is subject to change with ongoing market conditions. In this case, planning your budget can be a little difficult, because interest rate varies over time. But these interest rates are great when you are looking for a savvy option and borrowing for a longer tenure.

When Should You Choose a Floating Interest Rate?

When the market is steady, and your gut instincts say that the interest rate is going to remain constant, you can go for a floating interest rate.

Pros of Floating Interest Rate

The floating interest rate is usually lower than the fixed interest rate.
It is highly sensitive to market situations.
EMI keeps fluctuating with ongoing fluctuations in the market.
If the interest rate rises during any period of your repayments, it will not be the same throughout your repayment term.
The loan repayment time can be reduced with this type of interest rate. Hence, it provides a great option for funding when you plan to get another loan shortly.
No prepayment penalty when you choose to complete your repayment before the tenure ends.

Cons of Floating Interest Rate

Due to the rise and fall of interest rates, EMI in these loans is highly subject to changes. Hence, it doesn’t allow you to plan your finances.
In case market rates go up, you need to pay higher EMIs. It can stress you financially.

Key Difference Between Fixed Interest Rate

On the Basis	Fixed Interest Rate	Floating Interest Rate
Nature of Interest Rate	Higher	Lower
Market Effect	Not bothered by market fluctuations	Vulnerable to market changes
EMI	Fixed monthly repayments	Variable monthly repayments
Repayment Forecasting	Easy to plan repayments and budget	Unpredictable repayment plan
Key Benefit	It makes you feel secure	It helps you generate savings
When it’s suitable	Good for short-term	Good for long-term

Which Interest Rate is Better?

While choosing an interest rate is solely your decision. Always make sure you consider the benefits and factors mentioned earlier in this blog to save more in the long run. Loans with fixed rates guarantee your stability. Also offers predictable EMI, making your monthly budget less stringent.

For floating rates, consider the following factors while you choose the best option for you: