Fixed or Floating Interest Rate: Is it the best time to shift to a fixed rate loan? – bank loan fixed interest rate is better or floating how to decide

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Fixed or Floating: Both fixed and floating interest rates have their own advantages and disadvantages. These may be fine for different situations. However, there are many factors involved in shifting from floating rate to fixed rate. These factors can have a huge impact on your finances. Before switching to a fixed rate loan, let us look at some of the factors that need to be considered. Telling us about this, Adil Shetty, CEO of BankBazaar.com.

interest rate trend

In the last three meetings of the Monetary Policy Committee of the Reserve Bank, the repo rate was kept unchanged. The repo rate remains stable at 6.5%. Because of this the interest rates remain stable. Although the RBI has been successful in controlling inflation, it is possible that interest rates will continue to rise in the future. This can be said on the basis of ongoing economic conditions at the domestic and global level. The prospect of a hike in interest rates is perhaps the main reason why borrowers are considering shifting to fixed-rate home loans. If you believe interest rates may rise, locking in a fixed-rate loan can protect you from potential future increases. Conversely, if it is expected that interest rates will remain stable or fall, then sticking with the floating rate will reduce your overall borrowing cost.

financial stability

financial stability

Fixed-rate loans with payments that are precisely known to the individual are easier to incorporate into their budget, compared to floating-rate loans that are more difficult to incorporate as interest rates rise or fall. Due payments may vary. But, before making the switch, assess your financial stability and your ability to handle fluctuations in your monthly payments. If you prefer to pay a flat amount, then a fixed-rate loan is the way to go.

loan tenure

loan tenure

Longer loan tenures are more affected by interest rate fluctuations than shorter tenures. Considering the uncertain environment with respect to future interest rates, if you are repaying a loan with a longer tenure, a fixed-rate loan may be a better option for you.

current interest rate differential

current interest rate differential

If you are going to take a loan, then pay attention to the interest rate offered by the bank or financial institution. Evaluate the current difference between fixed and floating interest rates. Sometimes, fixed rates are much higher as compared to floating rates. In this case, you must evaluate whether the stability offered by a fixed rate loan is worth it against the potential additional cost of borrowing.

personal risk tolerance

personal risk tolerance

Your risk tolerance is an important guiding factor. This is an important factor to consider when choosing between a fixed or floating rate loan. If you are risk-averse and would find it challenging to manage fluctuations in your monthly loan payments, a fixed-rate loan will give you greater peace of mind. After taking the loan, you will not have to worry about what is going on in the market.

economic factors

economic factors

The overall economic environment also plays a very important role in how you borrow. Economic indicators such as inflation, fiscal policy and global economic trends can have an impact on interest rates. It can swing in any direction. If ongoing economic conditions indicate a possible move in interest rates, a fixed rate loan would be a better option from a stability perspective.

flexibility

flexibility

Compared to floating-rate loans, there is typically limited flexibility associated with fixed-rate loans. This reduced flexibility is mostly offered in the form of restrictions on prepayment or foreclosure. If you are confident that you will repay the loan before the loan tenure, make sure that the fixed-rate option doesn’t charge you with penalties, thereby forgoing the benefits of prepayment.

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