Personal Loan Floating Interest Rate – Benefits & Drawbacks

You’ve decided on the house you want to buy. You’ve also decided on a bank from which to obtain a home loan. You’ve had a long association with the bank. You’ve been assured unofficially that due to your strong repayment abilities, you’ll be able to get the loan quickly. You intend to go to the bank the next day. The mood is upbeat, and the anticipation of purchasing your ideal home is palpable. You are, however, still in a pickle. You’re undecided about whether to take out a fixed-rate or a floating-rate personal loan.

What are Floating Rate Loans and How Do They Work?

The house loan is issued at a sum of Benchmark + Spread under floating loans. After March 31, 2016, all floating rate loans are linked to the Marginal Cost of Lending Rate (MCLR). The spread is determined by a number of criteria, including your capacity to repay the loan. The bank can adjust the benchmark rate (MCLR) on a regular basis. Even spreads can be altered technically, but banks rarely do so.

Consider ICICI Bank’s Personal loan interest rates. ICICI Bank is currently offering salaried staff personal loans up to Rs 1 crore at a 1-year MCLR + Spread of 30 basis points. There is an interest reset clause in MCLR linked floating-rate loans. As a result, your effective rate of interest will only be changed on interest reset dates. As a result, even though the underlying benchmark has changed, your effective interest rate may not change for some time.

There are several reasons to choose a floating interest rate on your home loan. Most investors are unsure whether to go with a fixed or floating rate of interest because each has its own set of benefits and drawbacks. Here are some reasons to get a house loan with a flexible interest rate:

Forecasting market conditions: If you expect home loan interest rates to fall in the future, you can choose a floating interest rate. A lower interest rate can help you save money on your loan.

There are opportunities to save money: Fixed interest rates are normally 1% to 2.5 per cent lower than floating interest rates offered by the same lender. This lower rate of interest can help you save money on your Personal Loan EMI month after month.

Borrowers who pick a floating interest rate can profit from market changes. The rate of interest will be lower than the base and fixed interest rates if market rates fall below the base rate. As a result, investors can benefit from the current economic conditions, while the borrower’s risk is reduced because he can benefit from unanticipated future gains.

Benefits of Floating interest Personal loan

  • Floating interest rates are typically 1% to 2.5 percent lower than fixed interest rates offered by the same lender.
  • A bank’s or non-banking financing company’s variable interest rates are frequently lower than the fixed rates it gives its customers. As a result, even if the variable interest rate rises, it may still be lower than the fixed interest rate previously offered.
  • If the variable interest rate is higher than the interest rate, it will not be for the duration of the loan. There are chances that the floating rates might come down after a certain period of time.

Drawbacks of Floating Interest Rate

The following are the disadvantages of a variable interest rate:

  • The monthly installments of a specific amount of loan will change over the loan lifetime due to the shifting nature of floating interest rates.
  • It is quite difficult to budget a loan with a fluctuating rate of interest due to the irregular monthly installments.
  • Because this interest rate option does not allow for a fixed payback timeline, you may end up paying more than you are comfortable with. As a result, you may find yourself with less funds and no budget plan.