Do you know the type of interest rate chosen can have a considerable effect on total loan repayment?
Imagine this: you’re preparing to purchase your dream home or a brand-new car, and you require a loan for it. The bank offers you an option with fixed interest remaining unchanged for the entire loan term, while another one is in change as market conditions. Which one would you choose? This decision can have a significant bearing on total repayment and financial planning.
Knowing the difference between flat interest rates and floating interest rates can make a man well-informed towards making a decision.
In this WeCredit blog, we will explore both flat interest rates and floating interest rates, thereby giving pros and cons and allowing one to choose the type of interest that best suits one’s financial needs.
Floating interest rate is one that changes time to time. It increases or decreases in the market or economy. This means that the EMI (monthly payment) of the loan can change during the repayment period.
Floating interest rates, or variable interest rates, fluctuate over a period of time dependent on the market condition. Usually, it is linked to a standard market rate like the repo rate or MCLR that helps banks to find out what interest has to charge.
The flat interest rate is fixed throughout the tenure of the loan. The interest is calculated on the original loan amount; it does not change with the payments made over time. This type of interest rate is mainly associated with auto loans, personal loans, and consumer durable loans.
| Aspect | Floating Interest Rate | Flat Interest Rate |
|---|---|---|
| Rate Variation | Changes with market conditions | Remains fixed throughout |
| EMI Amount | Can fluctuate over time | Stays constant |
| Interest Calculation | Applied on the reduced balance | Applied on the original principal |
| Market Influence | Affected by economic factors | Unaffected by market rates |
| Suitability | Long-term loans (home loans) | Short-term loans (personal, auto loans) |
Both floating and flat interest rates have their advantages and disadvantages; it all depends on the needs and risk appetite of the borrower. Floating rates may promise savings but come with uncertainty, while flat rates offer stability but with a higher interest cost. Only by carefully scrutinizing your own financial situation and the market trends can you arrive at the right decision on your loan.
WeCredit offers customized loan solutions to address your unique financial requirements, giving you a choice between a floating-rate loan and a flat-rate loan.