All banks and financial institutions will charge a certain interest rate on a loan amount that the borrowers take, which is their share of profit for the money and services they provide. For instance, when you choose to take a home loan, the interest rates for it may start at around 9%. The borrower repays the loan amount along with the interest charged on it.
Fixed Interest Rate and Floating Interest Rate
Home loans options available to you will either have to carry a floating or fixed interest rate towards their repayment.
A fixed interest rate does not change during the tenure of loan repayment. It is stable and often higher when compared to the floating interest rate. This interest rate is not affected by the fluctuations in the conditions of financial markets, and the EMIs (Equated Monthly Instalments) that a borrower pays are fixed and remain the same. Fixed interest rate loans are a good option for the borrowers when they want to take a loan for short to medium term (in between 3 to 10 years). Because the borrower is aware of the interest rate, these loans carry a lesser risk. The loans provide better leverage towards financial and budget planning and carry with them a sense of security.
As the name suggests, the floating interest rate is not stable and may vary with the market fluctuations. Because of the instability involved, these interest rates are often lower initially. But if the market fluctuates, the interest rates may rise and may be much greater than the fixed interest rates for repayment. Because of the volatility and unpredictability involved these loans with floating interest rates carrier a higher risk. Because financial markets are more stable in the long run, borrowers should opt for a floating interest rate loan only when they wish to repay in a longer time period (for instance 20 to 30 years). The EMI amount will keep on changing for a floating interest rate loan repayment. But in the long run (for instance 30 years), home loans with floating interest rate will be a cheaper option for the borrower.
Leading banks and non-banking financial institutions offer home loans and other loans at both floating and fixed interest rate. You can make a careful pick by knowing and calculating your return period.
Additional read: What Is Floating Interest Rate And What Are Its Pros And Cons?