| Definition |
A loan where the interest rate remains constant throughout the loan tenure. |
A loan where the interest rate fluctuates based on market conditions or a benchmark rate. |
| Interest Rate |
Fixed and predetermined at the time of loan approval. |
Variable and can change during the loan tenure. |
| Rate Predictability |
Highly predictable; monthly EMIs remain the same. |
Unpredictable; EMIs can increase or decrease. |
| Stability |
Stable and safe in case of rising interest rates. |
Can benefit or suffer depending on rate movements. |
| Initial Interest Rate |
Usually higher than the initial floating rate. |
Generally lower initially compared to fixed rates. |
| Best Time to Choose |
When interest rates are expected to rise. |
When interest rates are expected to fall or stay stable. |
| Loan Tenure |
Usually preferred for short to medium tenures. |
Often chosen for long-term loans due to rate flexibility. |
| EMI Amount |
Fixed EMI for the entire tenure. |
EMI amount may change based on rate revisions. |
| Budget Planning |
Easier budgeting due to consistent payments. |
Difficult to plan as EMIs can fluctuate. |
| Interest Cost Over Time |
Can be higher if market rates fall. |
Can be lower if market rates decline. |
| Prepayment Charges |
Often involves prepayment penalties. |
Usually no prepayment penalties. |
| Risk Level |
Lower risk for the borrower. |
Higher risk due to market rate volatility. |
| Common Usage |
Home loans (short-term), auto loans, personal loans. |
Home loans (long-term), corporate loans, education loans. |
| Loan Restructuring |
Less flexibility in rate adjustment. |
Banks may offer periodic rate adjustments. |
| Transparency |
Fully transparent; fixed terms. |
Depends on clarity of benchmark rates and reset frequency. |
| Impact of RBI Rate Cuts |
No benefit to borrower as the rate is locked. |
Can result in lower EMIs if lenders pass on the benefit. |
| Refinancing Requirement |
May require refinancing if rates drop. |
No refinancing needed as rates adjust automatically. |
| Overall Suitability |
Conservative borrowers preferring certainty. |
Risk-tolerant borrowers expecting rate drops. |
Fixed Rate Loan vs Floating Rate Loan
