Educational Article • 6 min read
Fixed vs Floating Interest Rates
When applying for a mortgage, business loan, or home loan, one of the most critical decisions is selecting the **interest rate model**: Fixed or Floating (also known as variable or adjustable).
Fixed Interest Rates
A **fixed interest rate** stays exactly the same throughout the entire term of the loan, regardless of market index movements.
Pros:
- Budget Certainty: You know exactly what your EMI will be for the life of the loan.
- Protection against Inflation: If market interest rates rise, your loan cost remains locked at the lower rate.
Cons:
- Higher Entry Rates: Lenders charge a premium for locking in rates, making fixed loans slightly more expensive up front.
- No Drop Benefits: If market rates drop, you don't benefit unless you pay refinancing fees.
Floating Interest Rates
A **floating interest rate** fluctuates over time based on a benchmark market index (e.g. SOFR, Prime Rate, or RBI Repo Rate).
Pros:
- Lower Starting Rates: Typically 0.5% to 1.5% lower starting interest than fixed rates.
- Rate Drops: If central bank benchmark rates drop, your monthly payment automatically decreases.
Cons:
- Volatility Risk: If market rates spike, your monthly payments can rise significantly.
- Budgeting Challenge: Difficult to forecast long-term household expenses because payments fluctuate.
Compare Loan Rates Side-by-Side
Use our comparison calculator to see how a lower starting floating rate compares to a locked fixed rate over time.
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