Definition
Fixed vs Floating Interest Rate
A fixed-rate loan keeps the same interest rate throughout, while a floating-rate loan's rate moves with a benchmark over time.
With a fixed interest rate, your rate — and usually your EMI — stays constant for the whole tenure (or a fixed period), giving certainty but typically starting higher. With a floating rate, the rate is tied to a benchmark like the repo rate or MCLR, so your EMI or tenure changes as the benchmark moves.
Floating-rate home loans are the norm in India and benefit borrowers when rates fall, but raise costs when rates rise. Fixed rates suit those who prioritise predictable budgeting and expect rates to climb.
For floating loans, regulators require lenders to let borrowers switch to fixed rates or adjust tenure/EMI when rates change. Read the reset terms carefully before choosing.
Related terms
- EMI (Equated Monthly Instalment)An EMI is the fixed monthly payment you make to repay a loan, combining both principal and interest.
- MCLR (Marginal Cost of Funds Lending Rate)MCLR is an internal benchmark that determines the minimum interest rate at which a bank can lend, based on its cost of funds.
- Repo-Linked Lending Rate (RLLR)RLLR is a lending rate tied directly to the RBI's repo rate, so changes in the repo rate quickly flow through to borrowers.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.