If you’ve taken a personal loan recently or are considering one, there’s an important update you should be aware of. The Reserve Bank of India (RBI) has mandated that all banks must offer a fixed interest rate option for equated monthly installment (EMI)-based personal loans. This means borrowers will now have the choice between fixed and floating interest rates, giving them more control over their loan repayment. So, what does this mean for you? Let’s break it down.

• Why did RBI introduce this rule?

Interest rates have been rising since May 2022, mainly due to inflation and economic fluctuations. Many borrowers found themselves in a tough spot with increasing EMIs and longer loan tenures. Some even faced negative amortization, where their EMI payments were lower than the interest accrued, causing the outstanding loan amount to increase instead of decrease.

To help borrowers manage these challenges, the RBI now requires banks to offer a fixed interest rate option. This gives borrowers the flexibility to choose a loan structure that suits their financial situation.

• Fixed vs. Floating Interest Rate: Which one is better?

Understanding the difference between fixed and floating interest rates is crucial before making a decision.

1. Fixed Interest Rate: The interest rate remains unchanged throughout the loan tenure. This means your EMI amount stays the same, helping you plan your finances better. However, fixed-rate loans may have a slightly higher interest rate than floating-rate loans.
2. Floating Interest Rate: The interest rate varies based on market conditions and RBI’s benchmark lending rate. While this option can be beneficial when rates are low, it also means your EMI amount may increase if rates rise.

If you prefer stability and predictable payments, a fixed interest rate might be the better choice. But if you’re comfortable with fluctuations and are hoping for lower rates in the future, a floating interest rate could work for you.

• How this Rule Benefits You

With this RBI mandate, borrowers now have more transparency and flexibility in managing their loans. Here’s what you gain:

1. Better Financial Planning: Fixed EMIs mean you won’t have to worry about sudden fluctuations in your monthly payments.
2. More Control Over Loan Terms: You can choose to switch between floating and fixed interest rates based on your financial needs.
3. Reduced Risk of Negative Amortization: With a fixed rate, you won’t be caught off guard by rising interest rates.

• Can Existing Borrowers Benefit?

Yes! The RBI has made it mandatory for banks to offer this option not only for new borrowers but also for existing ones. If you have a floating rate personal loan against property or any other EMI-based personal loan, you can check with your lender about switching to a fixed rate.

• Things to Consider Before Switching

Before making the switch, here are a few things to keep in mind:

1. Compare Interest Rates: Fixed rates might be higher than floating rates at the moment. Assess whether locking in a rate makes sense for you.
2. Check Bank Policies: Banks have their own policies on switching. Some may charge a fee for converting from floating to fixed rates.
3. Review Your Loan Tenure: If you have a long-term loan, consider how interest rate trends might impact your payments in the future.

• Final Thoughts

The RBI’s move to mandate fixed interest rate options for personal loans is a significant step toward protecting borrowers. By offering more choices and ensuring better communication from banks, this rule empowers you to take charge of your financial future.

So, whether you’re planning a big purchase, consolidating debt, or taking out a personal loan, make sure you explore your options. Fixed or floating, the right choice depends on your financial goals and comfort with risk.

ALSO READ: 5 Reasons for Choosing Gold Loan to Meet Immediate Fund Needs