Understanding Different Types Of Interest Rates On Loans


Loans have expanded the field of expensive purchases for us. The option to pay EMI every month is a convenient option to manage the repayment of loans, as well as the payment of additional bills. And the main factor that determines the interest rate of a home loan or personal loan is the interest rate on which you borrowed the amount.

However, even today, many people do not understand enough about interest rates and only care about when they apply for a loan. So let's start by knowing the types of interest rates provided by banks and lenders.

Fixed rate: Fixed interest rates do not change during the term of the loan. In addition, they are 1% to 2.5% higher than other types of rates. Therefore, not all lenders give you the opportunity to take your fixed rate loan.

Variable rates: These rates are also called variable interest rates. They are directly affected by market conditions and are therefore constantly changing. If the market loan rate has dropped, the EMI amount of the borrower will be reduced. On the contrary, if rates are increased, the amount of the EMI will also increase accordingly.

Fixed rates reset: This type of interest rate is fixed for a given period (for example 3 to 5 years). After this period, the rate changes for the next few years.

Floating fixed rate:

These interest rates are partially fixed and partially floating. Sometimes the total loan amount is divided into two parts and a fixed interest rate is applied to one, while a variable rate is applied to the other. A benefit to the borrower in this situation is that he must choose the division ratio of the loan amount. At other times, instead of the loan amount, the money order is divided into two parts and the interest rates are billed in a similar manner over the period.

Making the choice to choose the right interest rates might be a bit difficult at first. Therefore, always remember the following points:

• Compare current interest rates on your mortgage, car loan, education or personal loan with historical rates.

• Analyze if you are comfortable with paying for predictable or unpredictable EMI.

• In the case of a home loan, determine your period of residence in the house and whether you want to sell it in the future.

• You must have a stable income, in case you take out a variable rate loan. Because then, your monthly EMI payment could go up or down. Great if the amount goes down, but if vice versa, it should be affordable for you.

If you have to record interest every month, you can also opt for partial advance payments, in which you pay more than three EMIs at a time. Today, many banks offer you the opportunity to make partial prepayments to pay off your home loans, your education loans and, in some cases (not all). Personal loan also.

Comments are closed.