Fixed and Floating Interest Rate

Fixed and floating interest rate are the terms which are used in the context of loan or mortgage which is taken by individuals from banks or financial institutions. When any individual decides to take loan from bank he or she should know the meaning of fixed and floating rate interest rate.

Fixed Interest rate loans are those loans, where the interest rate on loan will remain fixed for the entire tenure of loan. So for example if an individual has taken 5 year loan which carries an interest rate of 12 percent then he or she will have to pay interest at the rate of 12 percent for entire 5 years if even interest goes up to 15 percent or it goes down to 8 percent.

Floating Interest rate loans are those loans where the interest rate on loan fluctuates with market rate of interest rate. In this banks give loan to individuals on the basis of base rate plus a floating rate which varies from bank to bank. So for example if the base rate is 8 percent and bank floating rate is 2 percent than individual will get loan at 10 percent. If the base rate on a loan goes down to 6 percent as they are market determined rates than rate on loan will also come down to 8 percent and if base rate goes up 2 percent then interest rate will go up to 12 percent.

Fixed rate of loans are always higher than floating rate of loans because fixed rate carry the risk of interest rate moving against the bank. Therefore an individual should look carefully before deciding whether to take fixed or floating interest rate loan.

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