It is important to remember that the interest rates do not change themselves. There are always certain situations like economic information on consumer spending or may be business inventories. There is no one person or organization that set the standards for thousands of nationalized and private banks. There is no one person to determine what the Banks/NBFC’s are willing to pay for the deposits and charge for the loans.
An influential and a powerful component of our economy is the interest rates that is generally monitored by the centralized banks. Our day to day decisions like buying a house, financing an education degree or a deposit is affected due to interest rates. Lower interest rates means more borrowing and higher rates results in less borrowing.
When we plan for a loan for any reason, the most important factor after finalizing the Bank/ NBFC is to know about the Type of Interest.
Fixed Rate of Interest : As the name suggest the interest rates remain the same through out the life of the loan. The only problem with this loan is that as compared to floating rate of interest it is a bit expensive as there is no risk attached. But this option is not available with all Banks/NBFC’s. Fixed rate of interest means that the EMI’s will remain same through out the loan tenure. Market fluctuations will not affect the interest rates and the monthly installments. During the early days of the loan the monthly installments serve the interest part whereas in the later stage the monthly installments complete the principal amount.
There are variants available that allows the borrower to fix the interest rate for specific tenure and can be reset with mutual consent at any point of time.
Benefits carried with Fixed Rate of Interest
- Fixed interest rate
Irrespective the market situations the interest rate and the fixed monthly installments remain the same through out the loan tenure. EMI’s remain the same as per the commitments.
Its an excellent option who believes in budgeting and wants a fixed repayment schedule, which is actually very easy to manage. The fluctuations do not effect the monthly budget.
The certain fixed installments brings the sense of certainty and security to the borrower. The borrower knows the exact EMI right from the beginning of the loan. It gives the confidence to budget accordingly, accurately and plan the future finances. This is beneficial for those who have a fixed income source or a tight budget. (Know more about the factor effect your loan EMI)
- Numerous Options
A lower interest rate, early payoff and different fixed rate options are available with good credit scorers. An early payoff can speedup amortization goal.
As the fixed budget brings the clarity regarding the EMI obligation and the planned repayment schedule brings the confidence of financial commitments. The fixed rate of interest come with few drawbacks also:
- Higher rate of interest of 1-2% as compared to floating rates
- Advantage of future cuts in interest rates will not be available as one has to continue to pay the fixed amount every month.
- This option usually comes with a penalty of pre-payments on the outstanding principal amount.
When to opt for a Fixed Rate of Interest
If the current rate of interest is below the average interest rates in past.
The strong possibilities of economic scenarios can bring rise in interest rates and this can help you to be locked with the current rates.
If you are willing to pay an extra amount to avoid the uncertainties, stability and better financial management.
If you do not want the market situation to affect the fixed monthly schedule.
If you have no plans to prepay your loan amount.
The ideal qualities varies in every kind of a loan. Borrowers should focus on the lender and the one who can omit the prepayment penalties. The bank reserves the right to change the rate of interest after every 5 years or so. Be careful about the lenders and assure that the company is reputed and offers the best possible deal as per your situation.