Some people are easily overwhelmed when faced with technical jargons especially in terms of their finances. An example of this would be the definitions of Fixed Interest Rate and Floating Interest Rate in loans and their implications.
You might be asking, “What the heck is the difference between the two aside from their spelling?” and yes, it can be confusing. But no worries because here’s a little Interest Rate 101 that might come in handy when you apply for loans!
Floating Interest Rate vs. Fixed Interest Rate: What’s the diff?
In a nutshell, the main difference between the two is the percentage of interest to be applied on your loan. With a Fixed Rate of Interest, the amount per month would remain constant throughout the tenure of your loan. Meanwhile, Floating Rate of Interest means that it will be subject to changes depending on certain market dynamics.
Weighing the Pros and Cons
Now that the basics are out of the way, let’s figure out the advantages and disadvantages of the two. The best thing about Fixed Interest Rate is that you can plan your finances ahead of time since it doesn’t change throughout your loan duration. However, it’s important to note that this interest scheme is slightly higher than the other. Also, if there is to be a rate cut in the future, you’ll still have to pay the same amount, which puts you at a disadvantage.
Meanwhile, Floating Interest Rate can be highly beneficial for you whenever there’s a fall in the market since your interest will significantly decrease as well. But then again, this advantage also comes with a drawback since it might also increase along the way, depending on the movement of market rates.
If you want certainty and prefer to have a fixed amount to set aside from your budget every month, then the Fixed Interest Rate scheme will work for you. However, if you want to do the financial game and foresee that the market rates will play to your advantage in the future, then the Floating Interest Rate just might interest you (pun intended).
At the end of the day, both options have their own sets of positive and negative attributes. The key is to figure out which one suits you better and your lifestyle. What works for someone might not exactly be your cup of tea so choose wisely!