What Does a Personal Loan Floating Rate of Interest Mean?

Instant Personal Loan App
If you have been researching about personal loans for some time now, one term which you must have come across in your research is floating rate of interest. However, although a number of online resources have covered this topic in the past, it still remains an area of equal interest and confusion among the average consumer.

Thus, in today’s blog post, we will share with you everything you need to know about floating rate of interest along with its various applications.

Without further ado, let’s get started.

What Is Interest Calculation?

One of the first and most important aspects we need to understand is the mechanics of interest calculation in a personal loan in New Delhi before comprehending the mechanics of a floating interest system.

In simple terms, the interest calculation is the process of determining how much in excess of the loan amount you have borrowed you will need to pay back to the lender for the services they have provided. Although the actual calculation of interest amount is dependent on a variety of factors, one of the most influential of them is the rate of interest being charged to you by the lender.

Fixed Interest Rate vs Floating Interest Rate

In India, most lenders charge you a fixed rate of interest on your personal loans, such as the ones you can avail by leveraging the ZinCash loan application. While a fixed rate of interest has its benefits both for the lender as well as the borrower, some lenders prefer charging you a floating rate of interest.

To understand this better, let’s take the help of an example.

Suppose you download the ZinCash loan application on your mobile phone and apply for an instant personal loan. Zavron Finance grants your loan application of ₹80,000 and informs you that you will be charged a fixed interest rate of 10% per annum, meaning you will be paying ₹8000 as interest amount per year throughout the tenure of your loan.

In this case, the EMI amount which would be payable is ₹3,692 per month for a total tenure of 24 months.

Thus, by extending you a fixed rate of interest, Zavron specifies and fixes in advance how much EMI you are required to pay every month and for how long.

On the other hand, if you approach a different financial institution and they charge you a floating rate of interest, the mechanics of this calculation will be slightly different.

You see, in simple terms, a floating rate of interest means that the amount of interest you will pay on your personal loan amount will vary based on market conditions. In this case, the lender specifies a base interest rate during the loan offer and, moving ahead depending on market conditions, changes the interest amount by a marginal amount to meet both your needs.

Another methodology often leveraged by lenders to determine a floating or a variable rate of interest is by benchmarking it with the repo rate set by the RBI (Reserve Bank of India). The repo rate can simply be understood as the rate of interest charged by the RBI on the amount it lends to commercial banks across the country. In this case, the lender will specify a spread on the repo rate set by the RBI and charge you an interest amount accordingly.

This is also known as RLLR or Repo Linked Lending Rate. While this has its advantages, any changes made to the repo rate by the RBI will mean that the interest rate on your personal loan will also change, and the advances will be extended to you.

Advantages and Disadvantages of Floating Rate of Interest

Now that you are aware of the essence of a floating rate of interest let us take a closer look at some of the potential advantages and disadvantages.

        Pros

1.      Lower Interest Rates

One of the first and most important advantages of a floating interest rate system is the fact that, more often than not, these are lower in comparison to the fixed rate of interest being charged on the same lending instrument.

For example, if there is a home loan available at a fixed interest rate of 15% per annum, there is a chance that you can get the same home loan at a variable interest rate of 12.5% per annum.

While it is true that sometimes the floating rate of interest can exceed the fixed rate of interest, this generally occurs when the market is in an extremely volatile state, and the best part is, this won’t last throughout the tenure of the loan.

2.      Potential Savings

In lieu of the earlier point, since the floating rate of interest is often lower than the fixed rate of interest, there is scope for you to save on interest payments, and this is essentially free income.

Since, in the long run, you can expect the floating rate of interest to be lower than the fixed rate of interest, you can hope to save a significant amount of funds by availing this option.

        Cons

1.      Unpredictable EMIs

One of the first and worst disadvantages of a floating interest rate system is that your EMI dues will be unpredictable as they have the scope of varying every month. While at first glance, this might not seem like that big of a deal, however in reality, as humans, we adore consistency the most, and the lack of it generally translates to anxiety and stress.

Along with this, since your EMIs are unpredictable, you essentially will have less freedom to plan your personal finances, which might significantly contribute to your stress levels as well.

2.      More Than You Can Afford

As we shared earlier, in some cases, the market might be extremely volatile, and there are chances that you will pay an interest rate which is significantly higher than your budget, making it difficult for you to afford.

While it is true that such possibilities are rare, we cannot shun them out completely and thus, when you are availing the features of a personal loan in Mumbai with a floating rate of interest, these need to be considered as well.

In Conclusion

When taking a personal loan, one feature that benefits both the lender and the borrower is certainty and consistency in repayment amounts every month, and a personal loan availed through the ZinCash loan application guarantees you just that.

Now that you know what is a floating rate of interest, which one will you choose? Let us know by commenting below.

Quick Links:

Comments

Post a Comment

Popular posts from this blog

How is Fintech Fulfilling Social Responsibility Amid Covid-19?

Image
The lockdown due to COVID-19 has induced a spike in the popularity of fintech applications. People are opting for net banking and mobile banking services. Fintechs are playing a vital role in diminishing the economic and social repercussions of the current COVID-19 catastrophe.  Expanding the financial horizons of low income families and small businesses can also help in a comprehensive recovery. Fintechs are more agile, competent and economical than the conventional financial services. These are the reasons behind their increasing reach among financially weaker groups and small and medium sized enterprises (SMEs). When the country was hit by the COVID-19 health disaster, fintechs enabled cashless and contactless transactions. They also helped to expedite the swift and efficient implementation of support measures taken by the government.   Many fintech companies have set apart their commercial objectives and for now they are concentrating on the welfare of their staff and consumers.
Read more

Personal Loan vs. Professional Loan: The Differences You Need to Know

Image
As offices and educational institutions around the world start resuming their operations after the COVID-19 pandemic, the need of the hour is skilled professionals who can assist them in their revival. Although organizations are willing to pay sufficient compensation to those with the right talent, the challenge is to find employees with the right skill sets. Thus naturally, it is important to constantly up skill our present abilities. However, although all of us have considered at least once to partake in an up skilling course, what hold us back is the options available to us to finance the same. Although we have heard of both professional and instant personal loan being available in the market, without learning about their complete differences, it becomes challenging to arrive at a decision, and thus in today’s blog post, we will take a deeper dive into the same. Without further ado, let’s get started. What Is a Professional Development Loan? One of the first and most import
Read more

Complete guide to Financial Technologies

Image
Fintech best portrays advancements that are being utilized to make money related cycles simpler, more effective, and more beneficial. Fintech organizations build up an assortment of programming stages, applications, equipment arrangements, and more to accomplish these objectives. Fintech utilizes present-day fintech applications that range from easy to complex, including:  •        Online and versatile financial stages •        Person-to-individual (P2P) installment applications •        Peer-to-peer and other tech-centered individual loaning stages •        Mobile installments   •        Contactless installments - permitting purchasers to pay in-store without swiping or embeddings their installment cards. •        Budgeting applications •        Blockchain innovation and cryptographic forms of money •        Brokerage administrations, including stock exchanging applications •        Software that computerizes beforehand arduous and repetitive assign
Read more