Fixed vs Floating Interest Rates: A fixed rate can give stability and simplicity, while a floating rate may save you money if interest rates fall.
One of the most important decisions you make when taking out a loan is whether to choose a fixed or a floating interest rate. But each type has unique benefits and drawbacks that can influence your financial plan in different ways. Let’s first understand what is fixed and floating interest rates.
Fixed Interest Rate: This means the interest rate does not change in a specified period of time. According to Mukesh Pandey, Director of Rupyaa Paisa, it easily allows you to budget and gives you the best option when you value income certainty.
“Fixed rates are always a bit higher than floating rates because floating rates don’t consider future interest and thus are a thinner on interest in return for loaning capital,” Pandey added.
Floating Interest Rate: On the other hand, a floating interest rate depends on the current market conditions. It tends to start lower than the fixed rates, and the rate can go lower, potentially meaning you can save a lot on interest costs over time.
But this advantage comes with the potential downside of rate hikes, which might increase your monthly payments without warning. This variability necessitates a greater risk tolerance and financial flexibility.
Fixed vs Floating Interest Rates: Making The Right Choice
According to the director of Rupyaa Paisa, here’s how to decide which one is better for you.
Risk Tolerance: A fixed interest rate may be preferred if you want predictability in your payments and financial stability. It protects you from rising costs if rates go up in the market.
Market outlook — If you expect to see a fall in market interest rates, a floating rate may be a better option, allowing you to take advantage of lower interest costs over the long term.
Finance: Do you have the capacity to manage an increased payment? If your budget can accommodate potential increases, a floating rate could provide initial cost savings.
Therefore, a fixed rate can give stability and simplicity, while a floating rate may save you money if interest rates fall.
