Personal loan can be
taken to meet the financial expenses of renovating the house, wedding expenses,
to take a vacation or to pay the medical bills. The lenders don’t interfere on
how the amount is being used, all they care about is you making the payments on
time. Personal loan doesn’t require you to submit a collateral and so the
interest rate charged is higher to cover the risk.
Since the interest rate
charged is higher, you need to check if the lender is offering you a fixed rate
of interest or variable rate of interest. Variable rate personal loan interest
rate fluctuates during the term of the loan. The repayment varies throughout
the loan tenure. Whereas, fixed rate personal loan interest rate doesn’t change
during the loan tenure. The repayments remain same throughout the loan tenure.
With fixed rate of
interest you will know how much EMI will be going towards making the payments
each month.
Benefits of fixed rate personal loan interest rate:
When a fixed rate of
interest is charged, you know that each month a certain amount will go towards
repaying the loan. When you have an idea of how much money you have to keep
aside, you can plan your finances in a better way and mentally prepare to
manage with the remaining finances for the rest of the month. The amount
remains fixed and is not subject to market situations. You will know how much
amount you will have to keep aside each month towards the EMI payment.
Benefits of variable rate personal loan interest rate:
Variable
rate is set based on the market conditions, so there is a good chance that the
rate might be low at any given time and you will be paying less interest on the
loan. And in the event you have extra income in hand, you can clear off a good
chunk of the loan at a lower rate of interest. You may be paying less interest
overall. If you have a longer tenure, the impact on change in interest rate is
greater.
Drawbacks of fixed rate personal loan interest rate:
If you are in need of a
personal loan on an immediate basis and the rate of interest offered at that
time is high and you opt for a fixed rate of interest, you will be paying a
higher rate of interest till the end of the loan tenure. You cannot make use of
the changing rate of interest and avail the benefit of being able to pay a
lower rate of interest. Your overall payment for the loan will be higher.
Drawbacks of variable rate personal loan interest rate:
Though there is a good
chance of the rate reducing, you are still taking a risk as the rate might rise
at a different time. Your monthly payments will fluctuate and you need to be
ready to pay more towards the EMI one month and manage your finances. There is
no guarantee in the rates might not go very high either. If you have an
additional source of income and if the interest rate is lower, try and clear
out the loan at the earliest.
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