Fixed vs Floating Interest Rates: Which is Better for Personal Loans

When you apply for a personal loan, one of the most important decisions you’ll make is choosing between a fixed or floating interest rate. This choice can significantly impact your monthly EMIs, overall loan cost, and repayment flexibility.
Let’s understand the key differences, pros, and cons of each — so you can make a smarter financial decision.

What is a Fixed Interest Rate?

A fixed interest rate means your loan’s interest rate remains constant throughout the tenure. Your EMI (Equated Monthly Instalment) stays the same every month — making it easier to plan your budget.

Example:
If you take a ₹5 lakh personal loan at a fixed rate of 11% for 5 years, your EMI will stay unchanged from the first to the last month.

Advantages of Fixed Interest Rates

• Predictable EMIs – easy for monthly budgeting
•  Protection from market rate hikes
• Suitable for long-term financial stability

Disadvantages

• No benefit if market rates drop
• Usually slightly higher than floating rates

What is a Floating Interest Rate?

A floating interest rate changes over time based on the lender’s benchmark rate or RBI policy changes. Your EMI can increase or decrease depending on market conditions.

Example:
If you borrow ₹5 lakh at a floating rate of 10.5%, and later RBI cuts repo rates, your EMI may reduce — but if rates rise, your EMI will increase.

Advantages of Floating Interest Rates

• Lower initial rates than fixed loans
•  Benefit from falling interest rate trends
• Ideal for shorter tenures or when rate cuts are expected

Disadvantages

•  Unpredictable EMIs – harder to budget
•  Can become costly during rate hikes

Fixed vs Floating Interest Rates: Quick Comparison

Which is Better for You?

The right choice depends on your financial situation and market outlook:

• Choose Fixed Rate if you prefer stability, have a fixed income, and want to avoid surprises.
•  Choose Floating Rate if you expect rates to fall or can manage varying EMIs.

Pro Tip:
If you’re unsure, some lenders offer hybrid personal loans — with a fixed rate for the first few years and a floating rate afterward. It’s a balanced option for risk-averse borrowers.

Conclusion

Both fixed and floating interest rates have their own pros and cons. Fixed rates bring peace of mind and predictability, while floating rates offer flexibility and potential savings.
Before deciding, compare rates, assess your risk tolerance, and analyze market trends. A small difference in rate type can save you thousands over your loan tenure.