Loan tenure and interest rate
Fixed interest rate vs. floating interest rate
Fixed interest rate
Floating interest rate
What to expect when you choose a fixed interest rate on your car loan
- There is consistency in the rate of interest charged throughout the year.
- The EMIs payable during the loan tenure remain the same.
- The changes in the market conditions have no effect on the amount that is paid in interest.
- Choosing a fixed rate of interest on your car loan makes it easier to plan your finances and plan for the future.
- In most cases, the rate of interest charged on a car loan with a fixed interest rate tends to be higher than that of a floating interest rate. This is largely to neutralise any fluctuations due to changes in the benchmark rate.
- When the benchmark rate drops, borrowers who have opted for a fixed interest rate do not get to enjoy the benefit of a lower interest rate.
What to expect when you choose a floating interest rate on your car loan
- With floating interest rates, the cost is much cheaper when the loan is initialised as compared to loans with a fixed interest rate. This, in turn, decreases the amount of the EMI until the time the benchmark rises above the fixed rate of interest.
- When the benchmark rate rises, the rate of interest charged on a loan with floating interest increases temporarily.
- When the markets drop, the rate of interest charged on a car loan with a floating interest rate further drops, thereby decreasing the amount of the EMI.
- One of the primary disadvantages of choosing a floating interest rate on your car loan is that it makes it difficult to plan and budget your finances.
- The lack of stability in the rate of interest charged can sometimes result in the borrower paying a much higher rate of interest on their loan at various points in the loan tenure.
Choosing between floating interest and fixed interest on your loan
I am Naisha Patel, a professional finance writer specializing in personal finance. I have been working in the finance sector for a long time. All the people seeking financial guidance are in different stages of life. I love to explore every possible angle of personal finance and simplify things for the common people.