Fixed vs floating rate loan
A fixed rate keeps your EMI and total cost locked in for the whole tenure. A floating rate can rise or fall with the market, so the total cost you work out today is only an estimate. Neither is better in every case: one gives certainty, the other gives up certainty.
Fixed rate and Floating rate side by side
| Fixed rate | Floating rate | |
|---|---|---|
| What happens to the rate | Stays the same for the whole tenure | Can rise or fall with the market |
| Your EMI | Locked | Can change when the rate changes |
| Total cost | Known when you sign | Only an estimate today |
| Certainty | High | Lower |
| If market rates fall | Your rate does not fall with them | Your rate can fall too |
| If market rates rise | Your rate does not rise | Your rate can rise, and so can the EMI or the tenure |
The EMI is not the price
An EMI is only an output of three inputs: how much you borrowed, the rate and the tenure. The number that tells you the real price is the total cost, everything you will repay over the full tenure. The rate type decides how solid that total really is.
Fixed: certainty
With a fixed rate you know your EMI and your total cost from the day you sign. That certainty can be worth having when your budget is tight. The price is that you do not benefit if market rates fall.
Floating: it moves
With a floating rate the cost you calculate today is only an estimate. It can come out lower if the market falls, and higher if it rises. Many floating loans are linked to a benchmark such as the repo rate, so a change in policy can reach your EMI, though not always at once.
Ask before you sign
Ask for the total amount you will repay, ask whether the rate is fixed or floating, and ask what it costs to prepay, since that decides whether you can cut the total short later. Maetis does not give lending advice.
A floating rate that rises (hypothetical numbers)
Suppose you borrow ₹6,00,000 for 5 years at 8 percent a year. The EMI is about ₹12,166 and you repay about ₹7,29,950 in all. Now imagine, as a simple illustration, that a floating rate had instead been 9 percent for the whole 5 years. The EMI would be about ₹12,455, about ₹289 a month more, and the total about ₹7,47,301, about ₹17,351 more. A fixed rate would have kept the first set of numbers.
Common questions
- What is the difference between a fixed and a floating rate?
- A fixed rate stays the same for the whole tenure. A floating rate can change with the market.
- Which is better for a loan?
- Neither in every case. Fixed gives certainty and floating gives up certainty. It depends on your budget and your comfort with change.
- Does a floating rate always go up?
- No. It can go down as well as up. Its total cost is only an estimate today.
- Can I prepay a loan?
- Often, but the terms decide whether there is a penalty. Ask before you sign.
Related terms
This page compares ideas and does not recommend either one. Maetis does not give investment, tax or legal advice.