A fixed rate loan is a loan where the interest rate on the loan doesn’t fluctuate during the entire term of loan or part of the total term of loan. This allows the borrower to accurately predict their future payments. In floating rate loan (also called variable rate loan) the rate of interest on the loan changes, depending upon the prevailing discount rate based on market conditions. It may increase or decrease.
Advantages of fixed rate loan: If the market conditions deteriorate and thereby interest shoots up, the borrower of fixed rate loan is not affected by such interest rate change. It is easier for fixed rate borrower to budget their future expenses.
Disadvantage: Often fixed interest rates are higher than the floating interest loans. Further, he cannot enjoy the reduced rate of interest when overall interest falls due to favorable market condition.
Advantage of floating rate loan: Normally, interest on floating rate of interest at the initial will be lower than the prevailing fixed rate of interest. If market condition is favorable, then the borrower enjoys reduced rate of interest for Floating interest loans, whereas the fixed rate borrower cannot enjoy the benefit.
Disadvantage: When the market conditions deteriorate and thereby interest shoots up, the borrower of floating rate loan is affected by such interest rate change and he has to pay more interest on his loan compared to fixed rate borrower.