In the fixed rate personal loan, the rate of interest charged for the loan remains the same for the entire loan period. The interest rate of the fixed rate personal loan is independent of the variations in the loan market.
The interest rates charged for the personal loans are higher as compared to other loans. Since the personal loans are not granted against any financial assets be it tangible or intangible, there remains a risk in the repayment of the loans. The lender usually gives the personal loan after considering the income, repayment ability and the personal circumstances of the borrower. In general, there are two types of personal loans available in the loan market – fixed rate personal loan and variable rate personal loan.
Advantages of Fixed Rate Personal Loan
The rate of interest in fixed rate personal loans remains the same throughout the loan period. In case of the fixed rate personal loan, the borrowers can protect themselves against the sudden changes in the loan market. The installments paid by the borrower in fixed rate personal loan remain same throughout the loan period. The borrower in this case have an exact knowledge of the installments to be paid in future and thus can arrange and plan his or her financial future accordingly.
Disadvantages of Fixed Rate Personal Loan
There are some disadvantages of the fixed rate personal loan. If the loan market is going through a depression, the loan rate may fall considerably, thus decreasing the loan amount substantially. However, the borrowers who have opted for fixed rate loan plans still have to pay the high rate of interest set earlier. Another disadvantage of the fixed rate loan plan is that the installments payable by the borrower remains fixed for the entire loan period. It is not possible for the borrower to repay the loan amount in one bulk payment. The interest rate for the loan remains the same over the entire loan period. Since the risk involved in the fixed rate interest loan is less, borrowers generally prefer it more than any other type of personal loans.
