Decoded: Fixed and floating interest rates in personal loans

When you shop around for personal loans, comparing interest rates is a smart starting point. But beyond the number itself, there’s another factor that can change your overall cost — the type of interest rate you choose.

Personal loans usually come with fixed and floating interest rates to choose from, with the difference between the two structures meaningfully affecting what you end up paying. This is why understanding ‘what fixed and floating interest rates are’ is so important.

Here’s everything you should know about how fixed interest rates differ from floating rates, including the pros and cons of each, to help you decide which option works better for your financial situation.

What is a fixed interest rate?
 

A fixed interest rate is one that stays unchanged for the entire loan tenure — no fluctuations, no surprises. This means if you take a five-year personal loan at a 12% interest rate, you’ll pay 12% every year, regardless of market movements or policy rate changes.

What is a floating interest rate?
 

A floating interest rate keeps moving during your loan tenure because it’s linked to an external benchmark — usually the lender’s repo-linked rate. So when the benchmark rises, your personal loan interest rate goes up; when it falls, your rate comes down. This means your EMIs or overall interest cost can increase or decrease over time based on market conditions.

In simple terms, the fixed and floating interest rates differ on one key point — fixed rates stay unchanged throughout the loan, while floating rates adjust based on market movements.

Difference between fixed and floating interest rates
 

Understanding the difference between fixed and floating interest rates helps you see how each one impacts your EMI stability and overall borrowing cost. While fixed rates offer predictability, floating rates move with the market and can change what you ultimately pay.

Here’s a quick comparison to help you choose the structure that fits your financial goals.

The hidden truth of floating interest rates
 

While floating interest rates can lower your EMIs when market rates fall, there are several reasons why they may not be the best fit for personal loans.

Here’s what can make them less practical in certain cases:

● Time frame
 

Most people assume that a drop in the market rate means an immediate revision in their personal loan interest rate. However, banks usually take time to pass on reductions, and since personal loans are short-term, the benefit often arrives late in the tenure. This impacts the overall interest savings, leaving very little real benefit from choosing a floating rate.

● Uncertainty
 

Floating rates only help if market rates actually fall — something that depends on monetary policy decisions and broader economic conditions. Because these movements are unpredictable, planning your repayments becomes harder.

●  Risk of unaffordability
 

If market rates rise instead of falling, your EMIs increase as well. This can quickly strain your monthly budget and make repayment tougher, especially for borrowers who prefer stability.

While you may benefit from floating rates during a falling-rate cycle, their unpredictability makes fixed and floating interest rates very different in terms of repayment stability. This is where fixed rates step in, offering the certainty many personal loan borrowers look for.

The certainty of fixed interest rates
 

When comparing fixed and floating interest rates, fixed rates stand out for one simple reason — they don’t change. Your EMI stays exactly the same from the first month to the last, giving you total clarity on what you’ll pay and making budgeting far easier.

Because fixed interest rates remain constant, you’re protected from any unexpected spike in market rates. There’s no guesswork, no adjustments, and no EMI fluctuations — just a predictable repayment schedule you can rely on.

Fixed interest rates also work on the reducing balance method, meaning that as your principal amount decreases, the interest charged reduces as well. This steadily lowers your interest outgo in the latter part of your loan.

Here’s a quick example to put this into perspective:

As the table shows, your interest amount decreases every month as the principal is paid down, and a larger share of each EMI is allocated toward repayment. This steady, predictable pattern is what makes fixed interest rates easier to manage when choosing between fixed and floating interest rates. It provides borrowers with clear visibility into their costs and a straightforward path to repayment.

FIRSTmoney personal loan: Fast, flexible, and built for your needs
 

Now that you understand how fixed and floating interest rates work, here’s a personal loan option that brings speed, flexibility, and simplicity together: the FIRSTmoney personal loan from IDFC FIRST Bank.

Designed for borrowers who want quick access to credit with minimal effort, this loan offers a fully digital, paperless experience with transparent terms and high convenience.

Here’s what makes the FIRSTmoney personal loan stand out:

• Fixed interest rates starting at 9.99% p.a.
• Loan amount of up to ₹10 lakh
• Instant disbursal within 30 minutes
• Flexible tenure options from 9 to 60 months
• No documentation — you only need your PAN and Aadhaar number and physical PAN card for video KYC
• 100% digital application process
• Withdraw funds multiple times and pay interest only on what you use
• Zero foreclosure charges, so you can close the loan anytime without penalties

Eligibility for the FIRSTmoney personal loan is simple — you can apply whether you’re salaried or self-employed, as long as you’re between 21 and 60 years of age and have a CIBIL score of 710 or above.

Once you meet these criteria, getting started is easy with a quick digital process:

1. Click on ‘Apply Now’
2. Register using your mobile number
3. Enter basic details to check eligibility
4. Choose the loan amount, tenure, and disbursement account
5. Complete video KYC by showing your physical PAN card
6. Get funds disbursed in as little as 30 minutes

With its fast processing, flexible features, and straightforward eligibility, the FIRSTmoney personal loan makes borrowing a simple and stress-free experience. It’s a convenient option for anyone looking for quick funds with transparent terms and complete control over repayment.

Choose the right personal loan interest rate
 

Both fixed and floating interest rates come with their own advantages, but the stability of a fixed rate often works better for personal loan borrowers who want predictable EMIs and full control over their repayments. With the FIRSTmoney personal loan, you can enjoy a smarter fixed-rate setup that makes planning easier, reduces your overall interest expenses, and provides complete flexibility.

Ready to apply? Explore the FIRSTmoney personal loan and get quick access to funds with simple, transparent terms.