Personal loans: Fixed vs variable interest rates and how to decide between them
In the realm of personal loans, the interest rate structure stands out as a crucial consideration. Borrowers typically encounter two primary options: Fixed and variable interest rates, each presenting its array of benefits and considerations.
Here's an overview of the main distinctions to assist you in determining which option may be more suitable for your needs:
The interest rate on your loan remains constant throughout the entire loan duration. Choosing a fixed interest rate for your loan offers several benefits, including:
However, there are drawbacks to selecting a fixed interest rate for your loans, which include:
The interest rate on your loan is subject to change based on an underlying index or benchmark rate. There is no doubt that choosing to repay your personal loan at variable interest rates has certain drawbacks that include:
Many borrowers are drawn to variable interest rates for personal loans in anticipation of potential future decreases. However, there are drawbacks to this decision, including:
Deciding between a fixed or variable interest rate for your loan hinges on your risk tolerance, financial objectives, and the prevailing economic conditions. Here are some factors to contemplate:
By taking into account these factors, you can select the type of interest rate that aligns best with your financial circumstances and risk tolerance.
The interest rates on personal loans can exhibit significant variance, typically falling between 10% and 24% per annum in India. The precise rate offered hinges on factors such as your creditworthiness (credit score, income), loan amount, loan tenure, and the lender's guidelines.
Personal loans commonly employ the reducing balance method. Interest is computed solely on the
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