Fixed Interest Rate & Its Difference With A Floating Interest Rate

When you apply for a loan against property, there are two types of interest rates you can choose from – fixed interest rate and floating interest rate. These rates depend on the MCLR; MCLR or Marginal Cost of fund based Lending Rate. It is the minimum lending rate below which financial institutions are not allowed to offer a loan to a borrower.

• Fixed Interest Rates

A fixed interest rate on your availed loan indicates that the rate of interest on your loan will remain intact for the entire tenor of a loan. Any fluctuation in market rates will not influence the fixed interest rate offered by the financial institution once the loan is availed.

However, if the market rates are declining, it is advised to pick a floating interest rate on your loan. Floating rates are market-linked, they change as per revisions to the base or reference rate. As the market rates rise or fall, so will the floating interest rate on your loan.

• Fixed vs Floating Interest Rate

Primary differences between floating and fixed interest rates include –

1. Fixed interest rates are comparatively higher than floating rates since financial institutions will not take a risk if the MCLR drops significantly in the future.
2. Pre-payment charges are not applicable for loans with a floating interest rate. However, in case of a loan with a fixed interest rate, there are some charges involved for prepayment.
3. If there is a revision of the MCLR, the floating interest rates on your loan will change accordingly, but loans with fixed interest rates will remain unaffected.

Hence, you need to be aware of the current MCLR and the economic situation of the market before applying for a loan against property and choose the type of interest which is well suited to your financial needs.

Also Read: Fixed vs Floating Interest Rate

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