If you currently want to apply for a loan at a financial institution such as a bank, then you should recognize a fixed interest rate and floating interest rates first so that the loan does not feel heavy because of interest.
As a borrower, you must take into account the interest on the loan, is it too large or not. Moreover, sometimes banks provide varied interest choices when you apply for a loan, including fixed interest rates and floating interest rates.
Interest is a service fee for a loan of money or it can be said as compensation provided by the borrower to the lender for lending money. For example, returns on loans or unsecured loans (KTA). You borrowed IDR 5,000,000 for 6 months, then you must repay your online loan in the amount of IDR 5,500,000 which is paid in installments every month to IDR 458,333,333. Well, the percentage of the loan principal paid as interest is called the interest rate.
So, what is meant by a fixed interest rate and a floating interest rate? What are the advantages of these two interest rates? Here’s the explanation.
Comparison of Fixed and Floating Interest Rates
Fixed interest rates and floating interest rates are types of loan interest rates in Indonesia. This interest rate is distinguished based on the nature of the interest calculation.
Fixed interest is an interest rate whose amount does not change during the credit period. Usually, the amount of this interest rate is clearly stated in the installment table and also in the credit agreement, where the interest rate will not change until the end of the credit period. For example, if the bank sets a 10% credit interest rate, then throughout the installment period, the customer will pay installments based on a 10% interest rate until the installments are paid off.
While the floating interest rate is the interest rate that always changes according to the dynamics of market interest rates. So if market interest rates rise, then this type of interest rate will also rise. And vice versa, when market interest rates fall. With this floating rate, the installments that you pay are not always the same every month. Therefore, the amount of floating interest rates cannot be clearly stated, either in the installment table or in the credit agreement.
Advantages and Disadvantages of Fixed and Floating Interest Rates
Each interest rate, both fixed and floating has its own advantages and disadvantages. This can be a consideration for customers when applying for loans, which types of interest rates are suitable for customers.
The advantage of fixed interest rates is that when market interest rates increase, the amount of interest that must be paid by customers does not increase. This means that the installment value will remain the same. The disadvantage is that when the market interest rate falls, the customer must pay a higher interest from the market.
Loan products that use this interest rate, usually are types of loans with a short time, such as KTA, motorcycle loans, and other short-term loans.
While the floating interest rate is the advantage that customers do not need to worry about the risk, whether the customer’s interest rate is too high or lace, because the interest rates have already followed market interest rates. The disadvantage is that customers cannot enjoy competitive benefits from market interest rates.
Loan products that use this type of interest rate are long-term loans such as mortgage loans, car loans, and other long-term loans.