Fixed Rate vs Variable Rate Business Loans: Which is Better?

First and foremost, it’s a myth that business loans with fixed interest rates are better than variable rates, or vice versa. Your selection should depend entirely on your borrowing priorities. 

Perhaps you're looking for a long-drawn tenure to repay the loan comfortably. Or, you want the lowest possible interest rate, even if it comes at an ultra-short tenure.

Whatever may be the case, you should compare and contrast the two before agreeing to one! 

Here's an overview of the two types of interest rates to help you out.

What is a fixed interest rate?

As the name suggests, a fixed business loan interest rate remains constant throughout your loan's tenure. Even if the market revises its lending rates from time to time, your rate doesn't alter. Fixed rates offer a sense of certainty as you know your exact tenure and monthly instalment beforehand.

So, if you fit the business loan eligibility criteria of a lender offering a fixed interest loan at affordable rates, it’s worth considering.

What is a floating interest rate?

Here, your interest rate on business finance or any other loan is subject to revision every quarter. This interest rate type is directly linked to the base rate determined by the Reserve Bank of India (RBI) and other economic factors.

You can also prepay a floating rate loan if you come into a large sum of disposable income without any prepayment penalty. This is an RBI mandate.

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When to consider fixed interest rates?

If you don't want any surprises and are happy with a flat rate, go for a fixed interest rate loan. Also, if you notice that the base rate in the market has been spiking with no real sign of dropping as low as the fixed rate you're getting, choose a fixed interest rate loan.

Remember, since fixed rates come with a pre-determined tenure and EMI, chalking out a repayment plan becomes easier. This interest rate type is also ideal for individuals who don't want to take any risks associated with the ups and downs of the economy.

When to consider floating interest rates?

If you notice that RBI’s base rate has been stable for a while and is expected to drop further, go for a floating interest rate. A floating interest rate awards you a real shot at paying very low interest rates during several quarters.

These rates can be significantly lower than fixed rates, but this entirely depends on the RBI base rate revisions and other economic conditions prevalent in the country. Naturally, your EMIs are also affected. So if you need to accurately assess your floating rate EMI against an ROI and tenure, a business loan calculator can do the job well.

Moreover, with the possibility of free loan prepayment here, you can pay off your loan quickly. This will bring down your total interest rate.

The bottom line

Know that you can easily switch from fixed rate to floating rate and vice versa. If you do plan to switch, keep the factors mentioned above in mind. In any case, make sure to check your potential EMIs with a business loan EMI calculator before applying for a loan!