While planning to Study abroad, the first thing that needs to be resolved is the financial gap. To fill this financial gap, the need for loans to study abroad comes. Overseas Education is something that can’t be afforded easily. Most of the people choose the option of student loan to fill this gap. However, there are certain things that should be kept in mind while applying for a student loan. One such mandatory requirement check is the rate of interest. Wait, Here is a catch. Interest rates can be categorized into two types. One is the Fixed rate of interest and the other is the floating rate of interest. In this blog let’s discuss the floating rate of interest in detail.
Table of contents
Understanding Floating Rate of Interest
The Floating rate of interest is the rate of interest that keeps on fluctuating as per the variations in the benchmark. These benchmarks include the Prime Rate or the LIBOR(London Interbank Offered Rate). It is also known as a variable interest rate because of its changing nature. On the flip side, the fixed interest rate remains constant and fixed for the entire tenure of the loan. The rate of interest is subject to revision every quarter.
Pros of Floating Interest Rate
There are various advantages to choosing a floating rate of interest over a student loan. Some of them are as follows.
- The floating rate of interest on student loans starts from very low interest rates.
- The rate of interest is usually more affordable during the first year of interest payment.
- There are chances to reduce the amount of interest, only if the inflation rate is not high.
- Floating interest rates remain lower than fixed rates for extended periods, especially during favourable economic conditions.
- There are more chances of substantial savings over the tenure of the loan, especially during a long repayment term.
- The dip in the interest rates decreases the monthly payment as well.
Cons of Floating Interest Rate
The floating rate of interest has some disadvantages as well. Some of them are as follows.
- Due to fluctuations in interest rates, the monthly interest rate payment is unpredictable.
- The total amount of interest may vary as the market rate fluctuates.
- The uncertainty of the interest rate payment creates challenges.
- The uncertainty can create stress and anxiety for borrowers.
- There are chances of paying more interest in comparison with fixed interest rate loans.
- Sometimes, overpayment of interest amount may increase the financial burdensome
- Sometimes overpayment may lead to difficulties in managing loan payments.
Indeed, availing of student loans with a floating rate of interest decreases the initial rates. It also provides flexibility in repayment of the student loans. However, there is a disadvantage as well. The interest rate can increase or decrease depending on the time and situation. The increase in interest rate may impact the financial planning of the applicant.
Always evaluate your financial situation and stability. Plan your financial goals at least for the upcoming 5 years. Then evaluate market conditions in the context of your loan.
The rate of interest which remains fixed and constant throughout the tenure of the loan is known as the fixed rate of interest while the floating rate of interest keeps on fluctuating in response to the changes in the benchmark rate.
The floating rate of interest offers lower interest rates initially but the rate of interest may fluctuate and can increase or decrease the overall rate of interest and loan cost. So, the choice between a floating rate or a fixed rate of interest should depend on the financial plan and stabilities. No matter which type of interest rate you choose, responsible financial planning is the key to the successful repayment of student loans.
To know more about the student loan application process, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience. Follow our social media handles on Twitter, LinkedIn and Instagram.