Borrowers can select between two types of interest rates – fixed and floating interest rates while applying for a personal loan. Due to the unsecured nature of personal loans, lending institutions usually charge a high interest rate against it, which increases the overall monthly instalment amount payable.
The kind of interest rate one opts for, in this regard, also has a significant impact on the EMI outgo. Therefore, applicants need to have a comprehensive idea regarding fixed vs floating interest rates to make an informed decision regarding the rate-type to opt for.
What is a fixed rate of interest?
In case of a fixed interest rate, borrowers pay interest at the same rate throughout the repayment period. One of the main advantages of fixed interest rates is that the rate is not affected by any changes in the market. Thus, for a fixed personal loan interest rate, borrowers can calculate the monthly instalment amount beforehand and set up a repayment plan that fits their budget.
Nevertheless, applicants comparing fixed vs floating interest rates should also keep in mind that the former is generally 2% to 3% higher compared to floating interest rates. One can consider availing personal loan against fixed interest rates if he/she is unwilling to undertake the risk of the interest rates rising during the loan tenure.
What is a floating rate of interest?
Floating interest rates are linked to either an internal or external benchmark rate and vary accordingly. This type of interest rate has two main components – index and spread. The index or benchmark rate is usually determined by the central financial institution, below which lending institutions cannot lend to individuals. Spread, on the other hand, is a margin determined by lenders based on a borrowers’ risk profile.
The Reserve Bank of India has mandated that all floating interest rates for personal loans provided by financial institutions and NBFCs after 1st October 2019 be linked with an external benchmark rate such as repo rate, 3 months and 6months treasury bills published by FBIL or any other valid rate.
Some of the advantages of the floating interest rate are as follows –
- According to RBI, the floating interest rate will also be revised every three months. Therefore, borrowers can quickly benefit from any revision in market rates.
- When the benchmark rate is reduced, floating interest rates will also come down. Thus, borrowers will be able to save a substantial amount on interest payment when they opt for a variable rate.
Personal Loan EMI calculator
Besides making a fixed vs floating interest rates comparison, borrowers should also make use of online tools like personal loan EMI calculators, offered by most leading financial institutions and NBFCs like Bajaj Finserv, to understand their repayment liability. With this tool, they will be able to compute their EMI based on the loan amount, repayment tenure and applicable interest rate. Apart from monthly instalment amount, the calculator will also display total interest and total amount payable to the lender.
Besides Loan EMI calculators, the NBFCalso provides pre-approved offers on unsecured financial products such as personal loans, credit cards, business loans and so on. Such offers accelerate the loan application procedure and eliminate the hassles involved. One can quickly check their pre-approved offer on a personal loan by entering nominal details like their name and contact number.
It should also be noted that regardless of the type, the interest rate will vary for each borrower. It is because there are several factors affecting personal loan interest rate such as CIBIL score, repayment capacity, income, employment credentials, personal loan eligibility criteria etc.
Consequently, there are several steps that borrowers can adopt to reduce their interest rates, such as lowering their debt to income ratio, maintaining a high CIBIL score for personal loan and clean repayment history. Applicants who are on good terms with their lending institution can also try to negotiate with their lender for a reduced interest rate.