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What is Fixed Rate?

December 24, 2015

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It is fixed interest rate for a loan, mortgage or investment. As the name suggests the rate of interest will be fixed for either the entire loan period or for the investment time period. Usually a fixed interest rate makes the customer feel comfortable to avail a loan. Whereas in case of investments the fixed rate ensure a consistent income to the investor.

Suppose you take a housing loan from a bank worth Rs.20 lakhs. Your loan tenure is 10 years. If you are having a fixed interest rate of 9%, then you have to pay Rs.25335 as your monthly emi. So when the loan tenure is finished you must have paid Rs.30.4 lakhs to the bank!

In case of investment suppose you invested Rs.20 lakhs on a company’s share in return of a fixed interest of 10% annually. Thus you will get Rs.16666.66 each month as simple interest. This is only for an example in actual practice the investments get compounded interests.

Advantages of fixed rate

Borrower can predict the exact amount to be paid back.
Any change in market doesn’t affect neither loan repayment or interest rate
Longer time period (usually higher than 10 years in case of loans)
A consistent return on investment.
No headaches or worries about interest rate variations on invested money until tenure is over
In investments also market fluctuations doesn’t have any effect on interest.

Disadvantage

Higher than variable interest rate
If the market rates goes down, user might have to pay higher interest rate because this rate is fixed for the entire loan period.
In case of investment if the market pay is higher for investments, then it will be a loss for the investor.