When availing a loan, it’s of utmost importance for a loan seeker to be acquainted with the pros and cons of floating interest rates as opposed to those of fixed rates. Almost every kind of credit, be it a loan or a credit card, is offered by the lender at either of the two rates.
While fixed interest rates may ensure the consistency of your periodic cash flows, the benefits of floating interest rates come in the guise of unforeseen dip in the rate of interest in the market.
Why should you pick floating interest rates?
As a potential debtor in India, it is very likely that the lower interest rates that come along with floating home loan rates in India as opposed to those with fixed rates may sound like an intriguing prospect. And it is indeed a delight for any debtor to pay as less interest charges he/she possibly can.
Along with the acknowledgement of the aforementioned benefit, it is also imperative to understand the meaning of floating interest rates in terms of its current and predicted value.
Benefits of Floating Interest Rate
Those who are keen to indulge in seeking long-term credits with no specific preferences for fixed payment schemes can reap the benefits of floating interest rates in a number of ways.
- Lower Rate of Interest:As a debtor, the need to pay interest charges may be the least pleasant part of the transaction. And hence, lower rates of interests are mostly favoured by those who wish to keep their present expenditures low.
- Unexpected Gains:It is also important to note that those who apply for loans with a floating interest rate expose their financial freedom to the operations and developments in the concerned market and respective economy. The risk taken by the debtor is minimized at the prospect of a future gain that may arise owing to the decrease in the interest rates in the market.
- Scope of Saving:A loan with floating interest rate makes the debtor pay less for the periodic installments as compared to one with fixed interest rates. Hence, the debtor is also allowed to save up the gain to minimize the scope of ‘shifts’ in the market. However, the discretion of the debtor remains the best judge of how much he/she can save till the time his/her respective economy allows.
The benefits of floating interest rates are manifold. However, to reap the majority of them depends on the individual debtor. As per his/her understanding of the current norms and regulations, predicted changes in his/her personal financial behavior and the multiple possibilities that may affect the financial realm, a debtor may decide whether to go for long term loans or short term loans.
For instance, for floating home loan rates in India currently range from 9.85%- 11.75%, depending on the bank or institution offering the scheme, and offer a considerable amount of saving as compared to the current fixed rates.
Disadvantages of Floating Interest Rate
It should be an imperative for you to analyze the demerits of the Floating interest rate before making a decision. One of the major contributors to the disadvantages is the volatile nature of the interest rates. Below mentioned are some of its disadvantages.
- Risk of High Interest Rates:The rate of interest here relies heavily on the market situation and market, which is volatile and unpredictable in nature. Due to this, the interest rate risk may increase to a limit that the loan may become difficult to repay within stipulated time.
- Risk on Budget:Money market directly influences the floating interest rates. A sudden change in money market can result to increase in interest rates. As a consequence in the end it would affect negatively to your budget making your planned expenses a bit more difficult to meet.
- Dependence on Prime Lending Rate:In case of negative changes in the market, the financial institutions try to play safe by shifting their sudden expense over customer’s shoulders. For this they start charging high margin over prime lending rates that ultimately affects the pockets of the customer.