These days it isn’t hard to avail a loan. With paperless approvals on loans, you no longer have to spend long hours waiting at the bank in those never-ending queues. Instant paperless approval on these loans has made life easy for a lot of applicants. Hence, it’s easy to jump at the thought of applying for one of these loans. However, only a few understand what a loan entails.
Additional Reading: Instant Paperless Approval For Loans And Credit Cards
To begin with, there are a number of loans available like a Personal Loan, Car Loan, Home Loan and Education Loan. To apply for these loans, you will have to check your eligibility and make sure you have a valid income proof along with an ID proof. Once you submit these documents, you can choose the amount you wish to borrow. Accordingly, you can calculate your EMI.
Now, are we forgetting anything in between there? Oh, yes we are! Loans come with an interest rate. It is usually a percentage that you will be paying back in addition to the principal amount already borrowed from the bank.
These interest rates are of two kinds, fixed and floating.
Additional Reading: Fixed Vs. Floating Rate Of Interest
Fixed Interest Rate
Like the name suggests, the interest rate doesn’t fluctuate during the fixed period of the loan. This allows the borrower to accurately predict his/her future payments. A fixed interest rate is attractive to borrowers who do not want their interest rates to rise over the term of their loan, thus increasing the interest expenses.
Floating Interest Rate
Unlike a fixed interest rate, a floating interest rate, also known as variable or adjustable rate, refers to a rate that isn’t fixed during the term period. Which means, it fluctuates over the term period depending upon market conditions. This will affect your EMI amount as this may increase or decrease depending upon market volatility. Floating interest rates are tied to a base rate and have a floating element. If the base rate is revised upward or downward depending on the market conditions, the floating interest rate is also revised accordingly.
Additional Reading: Floating interest rates and BPLR
Advantages And Disadvantages Of Floating Interest Rate
Floating interest rates are cheaper when compared to fixed interest rates when the interest rate outlook is easy. And even if the floating rate goes higher than the fixed rate, it will not be for the entire tenure. Interest rates are cyclical over the long run and hence will fall for some time over the tenure of the loan. Hence, with floating interest rates, you can save in terms of amount repayment depending on which phase of the interest rate cycle a loan is contracted.
On the flip side, in a floating interest rate loan, monthly instalments are uneven and will become difficult to budget.
If you’re looking for a loan with a floating interest rate, we have a ton of offers for you!