While borrowing personal loans, interest rates matter the most as they become very important through the debt repayment procedure till the closing of the loan. Borrowers have two types of options while taking a loan: Fixed rate of interest and the other is variable interest rate, each has several advantages and disadvantages. You need to check all the things like eligibility criteria, tenure of the loan, repayment procedures, and the terms/conditions of your loan. The interest rate may also differ from one lender or location to another. For instance: If you are applying for a Personal loan in Gurgaon, it may vary from a Personal loan to any other city like Mumbai, Lucknow etc. So, it’s imperative to check loan interest and the application process.
Here, in this blog, we will assist you in choosing or deciding which option is best for your needs:
Difference Between Variable and Fixed Interest Rates in Personal Loan
Fixed Interest Rate: The rate of interest on the particular loan amount will remain as it is or constant throughout the entire loan tenure. If you are selecting the fixed rate of interest, you will be liable to get several benefits:
Security of interest rate: While taking a Personal loan with fixed interest rates, you will be safeguarded from the potential risk of increasing interest rates. The interest rate will be fixed throughout the term of your loan.
Predictable Payment: With fixed interest rates, you can easily manage your budget as you need to pay a fixed amount throughout the loan tenure.
Variable Rate of Interest
In this interest rate criteria, the interest changes based on the underlying benchmark rate or index rate. Variable rates may provide lower initial rate, and sometimes it gets lower than initial rates. Sometimes, you may face unpredictable payments which may lead to several changes in your budget and monthly payment.
Fixed or Variable Interest Rates: What to Choose?
Deciding between a variable and fixed rate of interest for your loan amount may hinge on your risk tolerance. Everyone need to consider these things while choosing the best option:
Risk Tolerance
While considering risk tolerance, stability matters the most. When you choose fixed rate of interest, the payment for repayment or loan amount will remain unchanged throughout the period. It becomes very beneficial if you want consistency in your financial management and expenses. On the other hand, variable rate of interest can easily disturn your payment and finances as the loan amount or interest change in Variable interest rates. The payment will decline if rates are decreasing but also increases once the interest rates are rises. Therefore, assessment of financial stability becomes the need of the hour if you are borrowing loans.
Tenure of the Loan
The rate of interest on Personal loan may impact long tenure. In case you want to repay all your debts very quickly, the interest rates won’t be a big consideration at all. With a longer term, choosing a fixed rate of interest protects you from potential threat of financial balance. On the other hand, with variable interest rate, you need to pay accordingly: higher with higher interest rate and lower amount with low interest rates.
Financial Target
Do you want to manage your budget, then choose fixed rate of interest or if you choose reduced payments, its good to choose Variable rate of interest. You need to go through the terms and conditions of achieving a financial target with the prescribed rate of interest. You can manage your financial target in your locality by checking the interest rate in your area. For instance: Personal loan in Gurgaon, Delhi, Mumbai.
Penalties on Prepayment
Many loans comes with prepayment facilities and denying the borrower for early loan repayment. If you choose fixed interest rate, you can easily tackle your financial issues or may get several relaxations. It may be harmful in case of variable interest rate with the rise in variable rate of interest. In this case, you need to financing your loan or settle it as soon as possible.
Market Rate of Interest
If you have chosen fixed interest rates, you can easily anticipate with the increasing interest rates as fixed interest rates helps to secure lower rate. If there is a possibility that the rates may reduce, variable rate of interest is beneficial.
Summary
Choosing a fixed of variable rate of interest may be confusing as it depends on the status off your loan. In fixed interest rates loan amount, the interest will be fixed throughout the tenure. On the other hand, loan rates will increase or decrease based on the interest rate and the loan amount.
