Fixed vs Floating Interest Rates: What’s the Difference & Which is Better for You?

If you’re thinking of taking a loan — whether it’s a personal loan, a home loan, or a Loan Against Mutual Funds (LAMF) — you’ll come across two common interest types: fixed and floating. But which one is better for you?

That depends on how steady your income is, your appetite for risk, and how long you plan to repay the loan. At Quicklend, we want you to understand both options so you can make the right decision without disrupting your investment goals.

What is the Difference Between Fixed and Floating Interest Rates?

Here’s a simple breakdown to help you understand the core difference.

How does a fixed interest rate work?

A fixed interest rate means your rate and EMI remain the same through the loan term, making it ideal if you want certainty.

• EMI remains constant for the entire loan duration
• Easier to plan monthly budgets and long-term finances
• Not affected by RBI or market-driven rate changes

What is a floating interest rate?

A floating rate can go up or down based on economic trends and RBI policy, offering flexibility but also variability.

• Changes based on benchmarks like the repo rate or MCLR
• EMIs fluctuate during the loan tenure
• Often starts lower than fixed rates, offering initial savings

Example: Say you borrow ₹1,00,000 at 12% fixed interest for 3 years. Your EMI remains unchanged. But if you opt for a floating rate starting at 11% and RBI cuts rates, your EMI may drop. Conversely, a rate hike will increase your EMI.

How Do Lenders Decide the Interest Rate Type?

Rates are shaped by a mix of external economic conditions and your personal financial profile.

What drives the rate?

Several factors influence the lending rate your bank or NBFC offers.

• RBI repo rate movements and monetary policy
• Inflation levels and liquidity in the economy
• Internal lending benchmarks set by banks/NBFCs

Borrower profile matters too

Your financial background also plays a part in the final rate you receive.

• Credit score and repayment history
• Type and quality of collateral (in secured loans)
• Debt-to-income ratio and job stability

Secured Loans often offer both options

When taking a Loan Against Mutual Funds, you may get to choose between fixed and floating.

• Fixed is suited for long-term or risk-averse borrowers
• Floating may benefit market-aware or short-term borrowers

Which Option Suits You Best?

There’s no one-size-fits-all. Choose based on your mindset, income pattern, and loan purpose.

Choose fixed if:

You want stable, predictable monthly outflows and peace of mind.

• You are uncomfortable with fluctuating EMIs
• You're borrowing for a longer period
• You value consistent planning over possible savings

Go for floating if:

You can handle minor EMI changes and want to benefit if rates drop.

• You expect repo rates to decline in the near term
• Your loan is short-term or you have repayment flexibility
• Your income can absorb EMI fluctuations easily

Other Factors to Weigh

Beyond rate types, there are hidden costs and loan features you should be aware of before finalizing.

What about prepayment charges?

Some lenders charge fees for early loan closure, especially on fixed rate loans.

• Fixed rate loans often carry pre-closure penalties (usually 1 – 2%)
• Floating rate loans usually have no prepayment charges (as per RBI guidelines for individuals)
• Always check lender-specific terms before signing

How do RBI decisions affect you?

The Reserve Bank of India’s policies have a direct impact on your floating rate loan.

• Repo rate hikes = higher floating interest = bigger EMIs
• Rate cuts = lower floating rates = potential EMI relief
• Fixed loans stay unaffected by these changes

What if you're borrowing for a specific goal?

Your loan purpose should influence the interest rate structure you choose.

• Education or wedding expenses? Fixed might offer peace of mind
• Short-term business needs? Floating could mean cost savings

Can I Switch Between Interest Types Later?

Yes, most lenders offer ways to switch from one rate type to another — but timing and cost matter.

What are your switching options?

Depending on your lender, you can convert the rate type to a mid-loan.

• Internal switch with your lender (may involve conversion fees)
• Balance transfer to a new lender offering better terms
• Partial prepayment followed by restructuring

What are the costs involved?

Switching is not always free and depends on your loan stage.

• Conversion fees typically range from 0.5% to 1%
• May involve fresh documentation or credit reassessment
• Consider the tenure left before deciding

This flexibility can be helpful if your financial situation changes midway.

Conclusion

Choosing between a fixed and floating interest rate doesn’t have to feel overwhelming. Fixed rates offer stability and predictability, which can be comforting if you value financial consistency. Floating rates, on the other hand, may offer cost benefits if you are willing to navigate market-linked changes.

At Quicklend, we simplify secured borrowing by giving you flexible rate options on loans against mutual funds, so you stay in control of your finances. Whether you prefer stability or want to take advantage of market movements, we’re here to help you decide what fits best.

This is general guidance. For personalized loan advice, contact our team at Quicklend.