Fixed Vs Floating Interest rate
Interest rates are the most significant and vital aspect of any loan. It is a must to choose the right one to avoid financial stress. Whenever you are applying for a Two-Wheeler loan, the lender offers you a choice between fixed and floating interest rates. Based on the requirement, you need to select the one. You need to understand the risk level associated with both fixed and floating rates before making any decision.
| Fixed interest rate | Floating interest rate |
Under a fixed-rate scheme, the interest rate remains constant.
| Under the floating interest rate scheme, the interest rate is constantly changing according to the fluctuations in the Indian financial market
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A fixed amount of EMI is charged. The customer can block the rate according to their desire. The best part is that it does not differ according to the tenure of loans.
| The floating interest rate on two-wheeler loans depends on the base rate offered by different lenders. The interest rate is automatically revised according to the base rate changes.
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A fixed amount of EMI is charged. The customer can block the rate according to their desire. The best part is that it does not differ according to the tenure of loans.
| The floating interest rate on two-wheeler loans depends on the base rate offered by different lenders. The interest rate is automatically revised according to the base rate changes.
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The fixed-rate is usually 1-2.5% above the floating interest rate.
| The rise and fall of floating rates are temporary. It keeps on affecting the EMIS.
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A scenario in which fixed interest is suitable
- If you are a person who is looking for a fixed repayment schedule so as to plan your EMIs well in advance.
- Secondly, you should ensure that your monthly installment isn’t more than 30% of your net monthly salary.
- You foresee a rise in the interest rate in the future and, therefore, want to ensure that your interest amount doesn’t increase more than what you are currently paying. In such a scenario, the fixed interest rate can be used to lock in the current rate of interest being offered by the lender.
The scenario in which floating interest rate is suitable
- For short-term loans like motorbike loans, the floating interest rate could be a preferred option if you’re a risk-taker.
- When there are reliable indications that interest rates might decrease in the future.
- This type of interest rate usually suits people who do not possess enough insight regarding the market and, thus, want to stick to the market rates.
Bottom line
The main reason for comparing the floating and fixed interest rates offered in two-wheeler loans is to know how much each one will cost you. This will help you calculate how much you will have to repay each month on each of these options.
This should help you find the cheapest loan. Comparing other parameters such as the processing fee and the repayment tenure will help you find a loan that best suits your current needs.
