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A Complete Guideline About Floating And Fixed Interest Rate

In August 2019 the RBI brings down the MCLR by 0.35%, setting the current rate at 5.4%. With a drop in the MCLR the total cost of advances has lowered substantially, benefiting the customers. 

The MCLR or the Marginal Cost of Fund Based Lending Rate is the base rate below which the financial institutions are restricted from lending. Before providing the Lenders calculate their interest rate (both fixed and floating rates) depending on this base rate. 

What is a Fixed Interest Rate?

A fixed interest rate remains the same throughout your loan tenor. It does not change with the fluctuations in the MCLR or repo rate. Also, the EMIs of advances availed at a fixed interest rate remains fixed throughout your loan tenor. 

What is a Floating Interest Rate? 

A floating interest rate can fluctuate depending on the present economic condition, when there is a change in the MCLR. The EMIs of advances with such interest rate also changes with the fluctuation in the MCLR.

It is essential for every borrower to understand whether fixed or floating rate of interest will be beneficial when they avail long term credits such as a loan against property. You should also know the charges of your loan against property that you will have to pay along with the payable interest.  

Let’s take a look at whether fixed or floating rate of interest will offer better profit when you apply for a credit. 

Fixed vs Floating Interest Rate – which is Beneficial?
Advantages of Fixed Interest Rate: 

  1. Fixed interest rates remain unchanged throughout your loan tenor, which ensures you pay a predetermined EMI throughout the tenor. You can plan your finances well in advance and will be less likely to default on repayments. 
  2. Fixed rates are beneficial when applying for shorter loan tenor as your advance will be independent of the volatile market. 

Advantages of Floating Interest Rate:

  1. Financial institutions usually charge lower rates if you opt for floating interest. 
  2. If there is a drop in the MCLR, the interest rate at which you have availed your loan will lower, making your EMIs more affordable. 
  3. You do not have to pay any prepayment charges if you have availed a loan at a floating interest rate. 

Which Type Of Rate Should You Go For?

Your floating or fixed interest rate is one of the factors that affect the interest rate for loan against property. You can choose to opt for a floating interest rate if you have a high risk appetite and can understand the current condition of the financial market. It is suitable for advances with a longer tenor. You can avail a floating interest rate at 1% to 2% lower than fixed interest rate which you can benefit from. 

Fixed interest rates provide you with advances at a lower risk. Your interest rate will remain the same throughout the tenor and you can estimate your EMIs well in advance. You can easily keep your obligations lower by calculating your income and repayments.

Thus, while you avail advances, it is crucial that you compare between fixed vs floating interest rate and decide the type of your interest rate accordingly. Several financial institutions and NBFCs provide secured advances at an attractive interest rate. Bajaj Finserv is one such NBFC that offer secured credits like Loan Against Property at a competitive rate against minimal documents. They also provide balance transfer facilities, online account access, a prolonged tenor of up to 20 years, substantial loan amount of up to Rs. 3.5 Crore and other lucrative benefits. 

Bajaj Finserv also brings you pre-approved offers that reduce the hassle of the application process and saves you time. These pre-approved offers are available on both secured and unsecured financial products such as home loans, business loans, personal loans, etc. To check your pre-approved offer, you will have to share minimal details like your name and phone number. 

Now that you know the comparison between fixed vs floating interest rate consider checking the repo rate and MCLR before application. Besides, do make sure to make timely payments to avoid additional late payment fees and accumulation of debts. 

7 Ways To Get The Best Personal Loan Interest Rate

Personal loan interest rates tend to be a little higher than those on auto and home loans, mainly because a personal loan is a form of unsecured borrowing. That said, in the recent past, the RBI has cut the repo rate multiple times and a lower repo rate implies reduced cost of borrowing. Further, irrespective of RBI’s lending rate, you can secure a personal loan on favourable terms by scouting for the best offering, being tactful in your borrowing, and maintaining healthy financial habits.

To help you borrow affordably, here are seven ways to get the best personal loan interest rate.

Compare Lenders And Look For Value-Added Offerings

It’s important to pick the right lender. You can start by using a personal loan calculator to evaluate your EMI payments with different lenders. Next, check the fine print for other associated, ancillary and penal charges and make sure that you are getting good value for money.

Maintain a Healthy Credit Score

Your credit score is a numerical representation of your credit history and gives lenders insight into how you have handled debt in the past, what kinds of loans you have taken and how much of your available credit you utilise. As such, this 3-digit parameter is of vital importance and the higher your credit score is, the lower the personal loan interest rates will be.

Paying your credit card bills in full, servicing loan EMIs on time, limiting your credit utilisation, clearing debt faithfully, checking your credit report for errors and avoiding multiple loan applications during a short time-frame are ways by which you can boost your creditworthiness. In short, creditworthy individuals possess negotiating power, which is important if you want to secure a low interest rate on your personal loan.

Ensure That Your Debt-To-Income Ratio is Low

Similar to your credit score, another parameter that lenders evaluate is your debt-to-income ratio. It gives lenders insight into your cash flow management and basically sheds light on how much of your monthly income you can channelize towards repaying the personal loan. In terms of figures, if you find that your total EMI outgo, all borrowings and the personal loan included, crosses 50% of your monthly income, you should step back to re-evaluate your finances.

Having half of your income goes towards debt payments can be burdensome and according to some lender’s personal loan eligibility terms, you must have a debt to income (DTI) ratio of 40% or less to obtain a loan. Having a very low DTI ratio assures lenders of repayment and so, makes way for a favourable interest rate.

Consider Taking a Floating Interest Rate Loan

The interest rates on floating rate loans change with market conditions and the RBI’s repo rate. As a new borrower you stand to benefit more, since as of 1 October 2019 the RBI has asked for all floating rate loans to be linked to an external benchmark. Further, with the reduced repo rate of 5.15%, you can obtain a personal loan on cost-effective terms and benefit from pocket-friendly EMIs.

Opt For a Shorter Loan Tenor

Lenders consider, through your credit score and DTI ratio, your ability to repay the loan before approving your application. However, they do not have an absolute guarantee that your financial makeup will remain the same through the repayment tenor. As such, opting for a shorter tenor lends more assurance in terms of repayment and this can help you secure a lower personal loan interest rate.

Check The Interest Calculation Method

Lenders may often quote loans at a flat rate of interest. In the case of a flat interest rate loan, the interest is calculated on the initial principal amount. This gives you a higher effective interest rate when you do the math. On the other hand, with a reducing interest rate loan, the interest is calculated based upon the balance principal amount, at any given time.

Apply With a Creditworthy Individual

If you aren’t able to meet your lender’s personal loan eligibility terms, you can always consider a co-signer. This can prove to be cost-effective as well, especially if the co-applicant has a stellar financial profile. Further, with the greater amount of income behind repayment, you can look forward to competitive personal loan interest rates.

You can choose from different lenders based on their personal loan terms. For instance, when you opt for the Bajaj Finserv Personal Loan, you get access to funds up to Rs.25 lakh for a flexible tenor of up to 60 months and at cost-effective personal loan interest rates. Further, you can avail the flexi loan facility, which allows you to withdraw from your sanction multiple times without the requirement to make fresh applications while only paying interest on the amount withdrawn. You can also reduce your EMIs by up to 45% by paying interest-only EMIs for the initial part of the tenor.

To obtain a personal loan tailored to your financial profile, avail a pre-approved loan offer. Just provide your name and contact number to check the offer today