A loan serves as a vital financial tool to manage planned and unplanned expenses. When you repay a loan in Equated Monthly Installments (EMIs), the payment consists of the principal amount and interest charges. Generally, regulated lending institutions offer two types of interest rates: fixed and floating (also known as variable). Before applying, it is essential to understand the difference between fixed and variable interest rates and which one suits your financial profile and repayment capacity.
The type of interest rate you should choose depends on several factors, including your loan tenure, creditworthiness, and the current Repo Rate set by the Reserve Bank of India (RBI) . Let’s explore the fundamental differences between a variable rate loan and a fixed-rate loan in detail.
Simply put, what is a fixed interest rate? It is a predetermined rate where you pay consistent monthly installments throughout the loan tenure. This means the rate remains unchanged despite volatile market fluctuations. Given that your EMI obligation stays identical until the loan term is complete, it is an ideal option if you prefer strict monthly budget management.
A fixed interest rate remains constant throughout the loan tenure. Borrowers pay the same EMI every month, ensuring absolute predictability. Unlike a variable rate loan, fixed rates provide financial stability by shielding you from sudden spikes in the cost of borrowing.
Note: Some "fixed" loans in the Indian market may have a "reset clause" after several years as per the loan agreement terms sanctioned under RBI’s Fair Practices Code; always review your loan agreement for such terms.
These interest rates adjust periodically in line with shifting market trends. In the Indian NBFC sector, floating interest rates are determined by internal benchmarks like the Prime Lending Rate (PLR) or external benchmarks, which are subject to adjustments. According to RBI guidelines, lenders must provide borrowers with the option to switch to a fixed rate at the time of interest rate resets.
A variable rate loan fluctuates based on the benchmark rate of the lender. Changes can occur quarterly or semi-annually. Unlike a fixed rate, variable rates impact monthly payments, making them less predictable but potentially cost-effective when the central bank adopts a dovish (lower) interest rate stance.
| Feature | Fixed Interest Rate | Variable (Floating) Interest Rate |
| Rate Consistency | Remains identical for the entire tenure. | Fluctuates based on market benchmarks. |
| Initial Interest Rate | Usually higher (Premium for certainty). | Usually lower. |
| Budget Predictability | High; EMIs never change. | Lower; EMIs or tenure may increase. |
| Prepayment Penalty | Permissible for fixed-rate loans as per RBI norms (unless paid from own sources). | Zero prepayment penalties for individual borrowers on floating rate loans . |
Understanding the operational difference between fixed and variable interest rates helps borrowers choose the best option. While fixed rates offer stability, variable rates adjust with market changes, impacting either the EMI amount or the loan duration.
Choosing between fixed vs variable interest rates requires an honest assessment of your financial health. While applying for a loan, conduct a comparative analysis and decide which repayment structure aligns with your income growth. For those seeking transparent terms, Hero FinCorp, as a regulated NBFC, provides value-based products with a focus on customer-centric documentation and competitive market-linked rates.
A fixed interest rate remains the same throughout the loan term, while a variable interest rate is linked to a benchmark and may change based on RBI policy changes or market liquidity.
Initially, yes. Lenders charge a "premium" for the certainty of a fixed rate. However, if market rates rise significantly, the fixed rate may become cheaper than a variable rate over time.
Yes, most NBFCs allow a switch. According to 2025 compliance norms, lenders must offer a transparent transition process, though this usually involves a conversion fee. Always consult your lender’s Schedule of Charges.
Since personal loans usually have shorter tenures (1-5 years), many borrowers prefer fixed rates to ensure their monthly budget is not disrupted by sudden market shifts.
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