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Personal Loans: Fixed or Floating Interest Rate?


When it comes to applying for a personal loan, people tend to overlook a lot of things like the interest rate and processing fees as they are more concerned about availing the loan amount with EMIs as low as possible.

While it is good to focus on having a lower EMI one must not completely ignore the interest rates as they play the deciding role in accessing your final EMI.

For personal loan applicants, there are two types of interest rates, Fixed Rate and Floating Rate, which have varied impact on your monthly EMI.

Before we get in details, lets understand the basic difference between the fixed and the floating rate of interest.

What is Fixed Rate of Interest?

Fixed Interest Rates means that the interest rate will be fixed for the entire loan tenure. So, if one has taken a personal loan for a tenure of 3 years, then they can be rest assured that the interest rate will remain fixed for the entire loan tenure. This brings in the right advantage for some people who believe in doing proper financial planning for their future.

What is Floating Rate of Interest?

Floating Interest Rates usually mean that the interest rate can change during the loan tenure due to any circumstances. If you opt for a Personal Loan with a floating rate of interest, then one can be prepared for the interest rate changes during the loan tenure.

Benefits of Fixed and Floating Interest Rate of Personal Loan:

The repayments remain the same throughout the Loan Tenure so one can plan the financial life with ease. The starting rate of the Floating Interest rate is usually lower than that of Fixed Interest Rates.
During the times of low interest rates, fixing the loan can be an advantage since one can retain a low interest rate just in case the rates shoot steeply. This can potentially lower the repayments and the entire interest paid in the term, depending on the Lender. Loans with lower interest rates means lower EMI. This helps the loan borrowers to save money out of their monthly income. Do this can turn out in favour of the loan borrowers who intend to save money while completing the tenure of personal loan.
It is comparatively easy to track the cash flows and the borrower as well as the lender are fully aware of the process. It provides people with an option that individuals can earn according to the market conditions.

Cons of Fixed and Floating Interest Rate of Personal Loan:

The interest rate in the starting of the loan gets usually higher than that of the Floating Interest Rate. The interest rate could increase and make the overall rate of the personal loan expensive.
For any reason, if the interest rate decreases due to change in business or market conditions, the personal loan doesn’t get the benefit of the reduced rates and one might end up repaying almost the same amount. The monthly instalments get a little uneven because of constant change in the market conditions.

Who Can Apply for a Personal Loan?

The financial lenders set an eligibility criterion for individuals who wish to apply for a personal loan. Some of the criteria include:

  • Salaried employees and in some cases Self-Employed individuals as well.
  • Individuals with a minimum age of 21 years.
  • The minimum monthly income requirement varies from bank to bank but usually start from the range of Rs. 15,000 – 17,000.
  • The individual must be in the Job for at least 2 years and a minimum of 1 year with the current employer.

Documents Required to Apply for a Personal Loan:

  1. A completely filled and signed loan application form
  2. Valid Identity Proof along with the Address Proof
  3. Proof of Income showing the income source in the bank account
  4. PAN Card
  5. Updated Aadhaar card
  6. Latest bank statement and Salary Slip for the past 3-6 months
  7. Rent Agreement (if applicable)
  8. Photograph

It is important to decide the kind of interest rate you want to go ahead with before signing the dotted line as you will not get the option to change it later on. Both Floating as well as Fixed Rate of Interest have their advantages and disadvantages. It is advised to study both the interest rates, solve all your queries regarding them and only then take a decision.

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