While interest on loans continues to fluctuate due to the ongoing geopolitical issues, fixed equated monthly instalment (EMI) personal loans have become a go-to option for several borrowers in the country.
Fixed EMI loans are provided by leading financial institutions such as HDFC Bank, ICICI Bank, IDFC First Bank, Kotak Mahindra Bank among others.
These personal loans come along with consistent monthly payments.
However, there are both advantages as well as disadvantages of fixed EMI personal loans:
Predictable Monthly Outflow: Since the EMI stays the same throughout the entire tenure of the loan, your monthly outflow stays predictable. This happens regardless of market conditions.
Immunity From Interest Rate Hikes: While there have been consistent policy amendments from the Reserve Bank of India (RBI) there is always a risk of rates rising or falling due to economic conditions.
Peace Of Mind: The financial burden on the borrower is also reduced as they know their EMIs won’t be impacted with frequent changes in economic policies.
Higher Interest Rates: Financial institutions can charge a premium for fixed rates which is often as much as 1.5% to 2% higher than floating loans and it can rest in a significantly higher repayment amount.
No Benefit From Rate Cuts: As the central bank slashes rates or the markets cool down, floating rate borrowers pay relatively less whereas fixed rate borrowers miss out on such opportunities.
Prepayment Penalties: Many banks and financial institutions charge 2-4% foreclosure or prepayment fees on fixed rate personal loans, which is done to encourage early closure or refinancing.