Dec 13, 2018

What do you know about floating interest rate and fixed interest rate?

While taking a loan, the bank (or financial institution) will issue you a loan on either a fixed or floating interest rate. It is important to know the difference between the two and how once can benefit from them:

Floating Interest Rate

This means that the interest rate which is issued for your personal loan is pegged to the variable interest rate which is determined by the central bank (or financial governmental policy maker). The central bank may choose to either increase or reduce the interest rate based on their economic monetary and fiscal policy.

This may be a good initiative to take a loan if the current market interest rate is abnormally high and there is mass speculation that interest rates will drop soon. Not to say that there is no chance of the interest increasing.

On the contrary, stranger things do happen and the interest rate may even increase.

But based on the current market data and industry experts (at the bank also), may advise you to peruse a floating interest rate model with the assumption that interest rates will drop as per the government financial policy.

In the sort (or long-term), it is possible for an individual to pay a fluctuating monthly installment on their loan based on the market interest volatility.

Fixed Interest Rate

This generally means that the interest rate issued for a loan taken out on a principle sum will be fixed for the entire tenure of the loan. As opposed to a floating interest rate mechanism where the monthly repayment may vary according to the market interest rate volatility.

For individuals that have secured preferential interest rates or who want to be secure on the loan interest payments, using a fixed interest rate mechanism may be the best and safest method for greater financial planning.

This method may also be a mechanism to do so when taking out a loan if there is a forecast or market prediction that the government financial policy to interest rates may increase in the near future; and thus securing your loan with a fixed interest rate may be more prudent.

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