Pros and Cons of Fixed vs. Variable Interest Rates on Business Loans
Want to choose a loan but aren’t sure which one is good for you? Well, we will let you know here clearly. First of all, you have to understand the types of interest rates. Actually, it has two types: fixed and variable rates of interest.
On one hand, the rate of interest won’t change throughout the loan tenure which is known as a fixed rate of interest and you have to pay a fixed amount to your lender. On the other, your interest rates are not fixed and change according to the inflation and value of money from time and space.
Understanding Various Types of Interest
The rate of interest plays a very crucial role in defining the overall cost of your loan amount. If you choose a fixed rate of interest, the interest rates won’t be changed throughout the year. This fixed interest rate provides you stability and predictability in your repayment. Even if the financial market changes, your rate of interest won’t change and affect your loan amount. If you choose an invariable rate of interest, you need to deal with several types of invariable interests. Your rate of interest may change or fluctuate as per the market conditions. It means that your repayments go down once the market falls significantly.
Pros and Cons: Fixed Rate of Interest
Pros
- In fixed interest rates, you are aware of the repayment amount
- You can easily manage your financials because you know how much amount you need for the repayment process.
- The fixed rate of interest tenure is fixed and you have to manage your account related to your loan be you have a business loan in Bangalore or a Car loan in Delhi.
Cons
- In the Fixed rate of interest, you will face several issues like lack of flexibility. It means whenever the market rate goes down, you need to pay higher EMI to your lender.
- In the fixed rate of interest, you may face several restrictions by your lender on prepayment or postponement of your loan repayment.
Pros and Cons of Variable Rate of Interest
Pros
- Variable rates of interest provide several flexibilities to the borrower. You are entitled to pay a lesser amount if the market rate decreases.
- You can choose prepayment of your loan in case of invariable loans which enables you to pay off loans faster.
- You can negotiate your loan with your lender to get several benefits and offers.
Cons
- Variable rates of interest are unpredictable and you may face financial issues related to your loan like a business loan in Bangalore, a Home Loan in Mumbai etc.
- One of the major drawbacks of choosing a variable rate of interest is you need to get updated with the market trends of the financial domain to deal with the situation.
- If the market rates go high, the variable rate of interest will stretch your budget all.
- In variable rates, you are not aware of the future EMI you have to pay as it completely depends on the market and the fluctuations of the same.
Making Your Decision Clear
A good decision will help you make an informed decision player in the financial market. For instance: if you have chosen a variable rate of interest and the market falls, then you have to pay a big amount to your lender or financial institution towards your loan.
Sometimes, variable interest may save you lots of money on interest. On the other hand, if you don’t want to take risks in future EMI repayment, you can choose the Fixed rate of interest. In this mode, you have to pay a fixed amount to your bank and a fixed tenure. You are completely aware of what and how much money you need in your account for the repayment process. In this way, for some, a fixed rate of interest is good and variable rates of interest are considered by many.
Summary
Fixed and variable rate of interest differs in various ways. On one hand, where in fixed interest rates, you have to pay a fixed amount. On the other hand, you have to pay a variable rate of interest if you choose a variable interest amount on your loan.