Whenever you have more than one option to choose from, the decision becomes confusing. It is the same scenario when we compare Fixed interest rates vs. Floating Interest Rates. But do not worry, we will guide you through some aspects to choose a better option out of the two.
For every prospective borrower, interest rates are the most important factor considered to choose the lender. Whether you are applying for an online personal loan or a home loan, interest rates always matter.
Now let us dig deeper:
Fixed Interest Rate
In this case, the interest rate cannot change for the whole loan tenor. It simply means that borrowers will have to pay equal/same amount every month till the loan tenor gets over. Even if an interest rate cut is announced by the Reserve Bank Of India (RBI), the interest rate will not be affected.
Pros of Fixed Interest Rate
The biggest edge this interest rate has over floating interest rate is that, the interest rate and EMI amount does not change. It means that the interest amount will not be affected for the entire loan tenor. Thus, it becomes easy for the borrower to manage his/her future expenses. Since interest rates do not fluctuate over time, future planning is much easier when you opt for a fixed interest rate.
Cons of Fixed Interest Rate
The fixed interest rates are 1% to 2% higher than the floating interest rate, which depends upon the lending institutions.
Even if the interest rates are brought down by the Reserve Bank of India (RBI), you will not be able to take advantage of it.
Floating Interest Rate
Here in, the interest rate keeps changing as per the market fluctuations. The floating interest rates are tied to a base rate along with a floating element. The base rate or the index rate depends upon the government securities prices, and the floating element or the spread is an extra percentage that is added by the banks to cover the credit risk. Thus, if the base rate changes due to market fluctuation, then the floating rate will also get affected.
Pros of Floating Interest Rate
The interest rates are usually lower as compared to the fixed interest rate because the floating interest rates are linked to a banks’ Marginal Cost of Lending Rate (MCLR) and NBFCs base rate. Due to the uncertainty, borrowers get this advantage.
You should know that the RBI can reduce the repo rate to increase liquidity in the economy and vice-versa. So, whenever the repo rate is decreased, RBI believes that the commercial banks and NBFCs will give out more credit in the system, and the interest rate would be cheaper.
Cons of Floating Interest Rate
The biggest drawback of the floating interest rate is that the monthly installment amount can be changed anytime during the loan tenor. Thus, it can affect the budget of any household.
Current Market Scenario
Now, let us see what the current market trend is showcasing.
When we talk about home loan interest rates, banking and other financial institutions are attracting more and more customers by offering them cheaper floating interest rates. Floating interest rates are comparatively cheaper as the repo rate has been reduced by the RBI to stimulate the economy.
The decision between fixed vs. floating interest rates depends upon personal choice. However, industry experts feel that the interest will fall for the next 2-3 years so opting for a floating interest rate will help.
To check for a pre-approved loan offer, you can visit Bajaj Finserv’s website. It provides a faster loan approval facility along with competitive interest rates.
Essential facts to know before investing in RBI’s floating rate bonds
Discussed below are the intricacies of RBI’s floating rate savings bond that one should keep in mind before investing.
- Lock-in period
Similar to the earlier 7.75% RBI or GOI bonds, the new floating rate bonds will be repayable after 7 years from the date of issue. However, individuals, other than some specific categories of investors, cannot withdraw the invested amount before the lock-in period of 7 years is over.
Consumers, including those in a joint holding, and Hindu Undivided Families are eligible to invest in the RBI floating rate bonds. NRIs, however, are exempt from investing in these bonds.
- Floating interest rate
RBI has launched the floating rate bonds at an interest rate of 7.15%, replacing the previous fixed-rate 7.75% RBI bonds. The interest rate will be reset twice a year and investors will receive the interest payable on bonds every 6 months. Hence, the new floating rate bonds eliminate the cumulative interest payment option, wherein investors could receive interest at the time of maturity.
The bonds are available for subscription from July 2020, and the first interest reset will take place on 1st January 2021.
The floating rate bonds can thus allow investors the benefits of rate resets every 6 months. On the other hand, individuals can also opt for a personal loan on floating interest rate to improve their finances. It can help borrowers understand the trend of repo rate cuts and keep their loan repayment liability in check.
If one invests in RBI bonds at a floating interest rate, the interest received will be taxed based on the income tax slab his/her income falls under. Apart from that, TDS (tax deducted at source) will also be deducted from the interest income.
- Amount of investment
The minimum investment in RBI bonds at a floating interest rate in Rs.1,000 and in multiples of Rs.1,000 post an initial investment. There is no maximum limit to the investment amount in these bonds.
How to invest in RBI’s floating rate savings bond?
If one is willing to invest in RBI bonds at a floating interest rate, knowing the detailed procedure to do so helps initiate the investment with minimum hassle.
Individuals can invest in the RBI floating rate bonds through cash limit of up to Rs.20,000. Other than that, they can also invest in the form of drafts, cheques or by any acceptable electronic mode of payment.
It must be remembered that the bonds will be issued only in electronic form and held in the investor’s bond ledger account.
Certain things to keep in mind before investing
Although investing in RBI bonds at floating interest rates is attractive and can enhance one’s financial outlook, one must keep specific factors in mind before investing.
- If bonds are held by just an individual, he/she can make a nomination. The same also applies to the sole surviving holder of a bond.
- The bonds are not transferable except for transfer to the nominee or legal heir in case of death of the Bond Ledger Account Holder.
- Bonds under the new RBI floating rate savings bonds category cannot be used as collateral to avail loans from financial lending institutions.
Nevertheless, individuals requiring additional finance without any collateral can do so by opting for personal loans. One can further enjoy the benefits of repo rate cuts by opting for a personal loan on floating interest rate.
Financial institutions like Bajaj Finserv offer attractive personal loans at both fixed and floating interest rates, allowing borrowers to choose as per their convenience. They also provide a personal loan EMI calculator to help borrowers decide the suitable loan amount and repayment tenure, thus helping them plan personal loan EMI payment better.
The lender also brings pre-approved offers on several credit products like personal loans and business loans to make financing hassle-free and time-saving. One can check the pre-approved offer by entering his/her name and phone number.
As for the RBI bonds, keeping all the mentioned factors in mind, one should be able to make an informed decision before investing in the newly launched floating rate savings bond. This is a good option for investors who wish to avail the benefits of interest rate resets and improve their financial lookout.
So, RBI’s new floating interest savings bond is an attractive investment option for those willing to avail interest benefits. The factors discussed above should help one to decide whether to invest in bonds on a floating interest rate.
Borrowers, on the other hand, can avail a personal loan on floating interest rate for convenient loan repayment. It is also advised to know about the factors affecting personal loan interest rate for an informed decision.