Fixed vs. Floating Interest Rates: Which is better for your personal loan? | Mint

Personal loans have become a popular choice amongst people who are looking for quick funds to cover a big event or are planning a luxurious vacation and need some backup cash or are in some emergency and need urgent monetary assistance. Interest rates play a major role in determining your potential EMI for the personal loan which you will be required to repay on a regular basis.

However, personal loans are offered with mainly two types of interest rates; floating rates and fixed rates. In this article, we are going to understand these interest rates in detail.

What are fixed interest rates?

Fixed interest rates are offered at a constant rate against your personal loan and usually remain the same throughout your repayment tenure. With fixed interest rates, you can plan your repayment and calculate a rough EMI which you will be bound to pay every month. With this, you can evaluate your financial situation and accordingly decide which loan amount suits you best. Hence, this type of interest rate is ideal for personal loans with a longer repayment tenure.

What are floating interest rates?

Floating interest rates are typically offered with varying rates which may change over time depending on the market conditions and bank regulations. Hence, you can not determine a specific EMI for your personal loan repayment. Floating interest rates are offered at a lower rate as compared to fixed interest rates, hence, these can be a great option if you are looking for a short term personal loan.

Floating vs. fixed interest rates: Which is best for you?

Choosing whether a fixed interest rate is better or a floating interest rate can depend on various factors. Based on your financial capability, you will be able to evaluate your desired loan amount and the tenure for repayment. In case you decide to get a personal loan with a longer repayment period and are not in a situation where you can take much risk, then a fixed interest rate is the right option for you. 

In case you want a personal loan for a short period of time and are applying during a falling interest rate regime, then a floating interest rate is what you can consider. You can also choose a floating interest rate in case you have a promotion or may have extra funds in the near future. As with this, you can prepay the loan and avoid the chances of interest rate fluctuations.

Nevertheless it is highly essential to understand your needs and financial situation before you apply for a personal loan. This is because of the fact that the interest rates provided by personal loans are much higher than what is offered by other types of loans in the market. Hence, choose the loan type according to your condition and make an informed decision to avoid future debt traps.