Fixed or floating rate loans which one should you choose ?
- 1. Fixed or Floating Rate Loans Which one should you choose?
- 2. • To own a house is not an uphill struggle, lately. You will get a home loan for a nominal rate of interest if you have a decent credit repayment history. A high percentage of people take a home loan to buy a house. • There are two kinds of loans that will be applicable to your home loan. Fixed interest and floating interest.
- 3. Fixed Interest Loans • Fixed interest rate is one such rate in which a major portion of your EMI is used to pay interest during the initial years of the loan term. • On the flip side, a lion's share of the amount is used to pay off the principal during the later years of the term of the loan. The rate remains constant irrespective of the fluctuations in the market. • For eg: if you are paying Rs.1500 as monthly EMI during the first year and the loan is for 20 years, you continue to pay that same amount per month throughout the term of the loan.
- 4. • Since the EMI remains constant, we can easily make a budget for expenses with a touch of certainty. In other words, those who have taken a loan with fixed interest can envision and plan the budget accordingly. • We can allocate a particular amount, every month, for realizing our goal to own a house. • You will benefit from the fixed interest rate loan if there is a possible upsurge in the rate of interest. In that case, staying in a loan that charges fixed interest will be advantageous for you. • Suppose, if your loan charges 9% rate of interest and there are going to be an increase of 2% ROI in the near future, you will have to pay only 9% interest throughout, instead of 11%. You can save interest payment up to 2% points. Pros of Fixed Interest Loans:
- 5. Cons of Fixed Interest Loans: • Whatever may be the type of interest, by and large, fixed interest charges a higher rate of interest than floating interest. • If the floating interest rate is 9%, the fixed income rate will be 11%. There will be at least 1 to 2.5 % difference. This fact can be understood just by going through the repayment schedule. • If the ROI is going to slash down, fixed interest will not be helpful. In such a condition, you will benefit by taking a floating interest rate loan.
- 6. Floating Interest Loans • Floating Interest is one such rate that changes according to the fluctuations in the market conditions. • There will be two components which make up the interest amount of the loan. The base rate and the fluctuating rate. When the base rate changes according to the changes in the market rate, the base rate changes. As a result, the fluctuating component also adjusts itself to accommodate a fluctuation.
- 7. • Floating interest loans are comparatively cheaper than the fixed loans. • Even if, the floating rate of interest becomes higher, gradually, understand that it has only a fugitive effect as it will come down, subsequently. Pros of Floating Interest Loans:
- 8. Cons of Floating Interest Loans: • The customer will only benefit from the rate of interest comes down. • It will not be budget-friendly because the amount you have to pay as EMI will keep on fluctuating every now and then. • This type of loan is helpful only if the ROI doesn't raise over and above 11.5%.