When you are planning to take a loan, there are options to choose between a fixed rate and floating rate loan. Here is a comparison of both to understand the advantage and disadvantages, to have a better understanding.
There are several macro economical factors that can decide the interest rate in an economy. Interest rates are dynamic and inherently keep changing.
As I said earlier, while applying for a loan, you have option to choose either floating or fixed interest rates while repaying the loan as EMI (Equated Monthly Installment).
If you choose the floating rate, the major advantage that you always required to give the market rate at all times.
The major disadvantage of this is, in case there is major economic changes and that brings all the interest rates high, you will be in lose by giving the high interest rate to your lender because you choose the floating rate option.
In the other side if you are selecting the Fixed rate of interest on your loan amount, you have the major advantage of knowing the EMI’s in advance. This will be protect you from the risk of increasing your interest rate time to time.
The disadvantage of fixed interest rate affect you when the loan term is longer and the interest rate still unchanged if the rates are coming down due to the economic changes.
This will force you to pay the high interest rate compare with market interest rate and certainly you are losing extra amount such way. To be able to make your own choice, due to not able to predict the future interest rates, one need to consider his repayment capabilities and the risks he can take.