As more Indian students are looking to pursue higher education abroad, education loans are becoming an increasingly important source of funding. These loans are made possible by banks and other financial institutions including NBFC’s like Avanse Global, and assist students with tuition fees, living expenses, travel fees, and many more. One of the main decisions to make when applying for an education loan is whether to select a fixed or floating interest rate. The type of interest rate you select will affect your total repayment value, your monthly EMIs and financial planning.
Fixed Interest Rates
A fixed interest rate loan means that the interest rate remains constant over the entire loan period. This means that you know the exact amount you will repay monthly, making budgeting simple. Fixed rates are not subject to change even if there are any fluctuations in the market. It offers protection from widespread volatility in market prices.
Floating Interest Rates
Floating interest rates are uncertain and volatile. They vary with market fluctuations, especially the changes in Reserve Bank of India (RBI) repo rates. If the market rate decreases, borrowers would have the benefit of fewer EMIs. However, if rates increase, the borrower would have the risk of higher repayments.
Fixed vs. Floating Interest Rate
Interest Rate
- Initially, the fixed interest rate is higher than the floating interest rate.
- The floating student loan interest rates start lower, potentially leading to lower monthly payments.
Stability
- The fixed interest rate remains the same throughout the loan’s tenure.
- Floating interest rates change periodically based on the market conditions.
Equated Monthly Installments (EMIs)
- There are consistent monthly payments if you choose a fixed interest rate.
- In floating interest rate the EMIs are variable and change with the MCLR rate.
Rate Risk
- Borrowers do not face the risk of high monthly payments with a fixed interest rate.
- Borrowers face the risk of the monthly payments getting higher if the interest rate rises in floating interest rate.
Prepayment Penalty
- In fixed interest rate, if you repay your loan before its tenure most lenders will charge a repayment penalty. This is because it affects their expected interest earnings.
- Under RBI guidelines there is no prepayment penalty on floating interest rate abroad education loan.
Ultimately, the decision you make about fixing or floating interest rates depends on your financial position, risk tolerance, and market trends. Make sure to assess what factors are most important to you, speak with financial advisors, and determine which option works best for your loan for studying abroad.
