When a loan is taken by the borrower with floating interest rates, he agrees to the fluctuation in the interest rates as per the market movements. This type of rate of interest is also called as “variable rate of interest” as the interest rate can vary over the period of the debt. For floating interest rates there will be a base rate which will be informed while loan is approved and the actual interest rate will fluctuate below and above this base rate as per floating components. Interest rates are usually decided by NBFCs and banks as per RBI guidelines on a quarterly basis. And the floating interest rates are comparatively lesser than fixed rates though parameters such as current account deficit and inflation and marginal cost of funds are considered by FIs for base rate calculation.
The below table will give difference of fixed interest rates and floating interest rates among some of the top loan lending banks in India.
|Bank/ NBFC||Current Fixed Interest Home Loan Scheme||Floating Interest Rate for Home Loan|
|ICICI Bank||8.7% for 10 years for amounts up to Rs 3 millions||8.65% up to Rs 7.5 millions|
|HDFC Bank||9.85 % for only first 3 years||8.3%|
|PNB Housing Finance Limited||9.25% – 10.25% for 3 years||8.90%|
Here are Some of the Benefits of using Floating Interest Rates
- Lower Interest Rates:
As opposed to fixed interest rates the rate of interest will be lower in case of floating interest rates. In India, the floating interest rates range between 9.85% and 11.75%. This depends on the bank you have applied for your loan and will help you in saving some considerable amount. Lower interest rates will indirectly be a reason for other related charges to be lowered.
- Can Enjoy Unexpected Gains:
Those who choose to pick floating interest rates have the advantage of being benefited from market fluctuations. In case if the market rates fall below the base rate, the interest rates will be lower than the base rates and even fixed interest rates. There will be financial freedom as per the market or economy conditions. Here the risk taken by the debtor is minimal and help in future gains.
- Scope of Savings:
Loans with lower interest rates mean low EMI amounts. This will help the borrowers to save some money out of their monthly income. However it is at the discretion of each individual whether to save the money or spend it.
Why choose Floating Interest Rates over Fixed?
It is definitely better to choose floating interest rates in case if you do not predict the markets to move in unfavorable situations. Also for short term loans, the best option is floating interest rates over fixed as there is less likely chance of interest rates varying drastically within few quarterly. Apart from these do a thorough research at the bank level which will be lending you loan. They might have specific terms and conditions which will affect your benefits list. Floating interest rates are calculated on the basis of Marginal Cost of Funds and current market conditions.
Depending on the type of loan you require, it is important to decide whether to choose fixed interest rates or floating interest rates. In case if you have plans of pre-closing the loan through part payments before the tenure of the loan, it is advisable to choose floating interest rates. As long as the loan is only upto 5 years, choosing floating interest rates is wise decision. Incase if your loan tenure is beyond 5 years, it is advisable to choose fixed interest rates.
Also in case if you have sufficient monthly income that will not be affected by the fluctuating interest rates then choose floating interest rates is a safe play. This will reduce the interest flow on your loan and it will be possible to repay the loan quicker than loans with fixed interest rates. Though the interest rates of floating and fixed type do not show much difference when the EMIs have to paid on this basis the amounts will be huge. Thus do not just the interest rates by its percentage difference, the actual value might be way above something you can afford in a month. Though all these are advantages, choosing between fixed and floating interest rates is totally up to the discretion of the borrower.