Understanding Different Types Of Interest Rates On Loans

Loans have widened the scope of making costly purchases for us. The option of paying EMI every month, is a convenient option to manage repayment of loans, along with paying another bills. And the prime factor which determines the rate of interest on a home loan or a personal loan, is the rate of interest, on which you have borrowed the amount.

However, even till today a large number of people do not have enough understanding about interest rates, and only bother to find out when they apply for a loan. So, let us first get to know what kinds of interest rates are provided by banks and lenders.

Fixed Rate: Fixed rates of interest do not change throughout the loan tenure. Also, these are 1% – 2.5% higher than other types of rates. Hence, not all lenders give the option of taking your loan on a fixed rate.

Variable Rates: These rates are also known as floating interest rates. They are directly impacted by the market conditions and therefore ever changing. If the market lending rate has dipped, the EMI amount of the loan borrower would reduce. On the contrary if rates are increased, the EMI amount will also go up accordingly.

Fixed Rates Which Are Reset: This kind of interest rate is fixed for a specific period of time (say 3 to 5 years). After this period, the rate changes for the next set of years.

Fixed-Cum-Floating Rates:

These rates of interest are partially fixed and partially floating. Sometimes, the entire loan amount is split into two parts, and fixed interest rate is charged on one while variable rate is charged on the other. An advantage which the borrower avails in this condition is that he gets to choose the ratio of dividing the loan amount. At other times, in place of loan amount, the tenure is split into two parts, and interest rates are charged in similar fashion on the time period.

Making a choice to select the right interest rates for you could be a bit hard initially. Hence, always remember the following points:

• Compare the current interest rates of your home loan, auto loan, education or personal loan, with the historical rates.

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

• In case of a home loan, decide your residing period in the house and if you wish to sell it in future.

• Your must have a stable income, in case you are taking a loan with floating interest rate. Because then, your monthly EMI payment could increase or decrease. Great if the amount decreases, but if vice-versa, it should be affordable for you.

If you need to save the interest every month, you can also go for part prepayments, in which you pay for more than three EMIs at once. Today, many banks give you the option of making part prepayments to repay your home loans, education loans and in some cases (not all) personal loan too.