Definition
Floating vs Fixed Rate Loan
A fixed-rate loan keeps the interest rate constant for the tenure or a period, while a floating-rate loan moves with a benchmark, changing EMIs or tenure as rates shift.
In a fixed-rate loan, the interest rate stays the same (often for the whole or part of the tenure), giving predictable EMIs but usually a higher starting rate. In a floating-rate loan, the rate is tied to an external benchmark (like the RBI repo rate via the EBLR system), so it rises or falls with rate cycles.
When benchmark rates change, floating-rate borrowers see either their EMI or tenure adjusted. RBI has mandated clearer disclosures and the option to switch to fixed rates in certain retail loans, plus protection against indefinite tenure extension.
The choice depends on rate outlook and risk appetite: fixed offers certainty, floating offers potential savings if rates fall but uncertainty if they rise.
Related terms
- Key Fact Statement (KFS)A Key Fact Statement is a standardised, plain-language summary a lender must give a borrower showing the all-in cost of a loan, including the annual percentage rate and all charges.
- EMI ConversionEMI conversion lets a credit-card purchase or loan amount be repaid in fixed monthly instalments over a chosen tenure, usually with interest or a processing fee.
- APRThe Annual Percentage Rate expresses the total yearly cost of a loan — interest plus mandatory fees — as a single percentage, enabling apples-to-apples comparison of credit offers.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.