While you are availing a loan, a customer is asked to pay EMI (Equated Monthly Installments) via three options - Fixed rate EMI, Floating rate EMI, and Step-down EMI.
Fixed rate EMI
A fixed rate of EMI means that your interest rate remains the saame throughout the tenure. Even if the interest rates of RBI fluctuates, it doesn't vary. It helps you when you don't want to take market risks. This type of interest rate would be advisable when rates are expected to be volatile.
Floating rate EMI
The floating interest rate depends upon too the market scenerio. The interest will be calculated on a base rate with a floating element. These rates are charged at a fixed spread above benchmark. But, the lender may have to pay higher EMI if the interest rate increases.
In this case, the customer can pay lower interest rate on loan as it is calculated on outstanding principal amount. It is opted by those people who have high upfront repayment amount, this helps in lower principal to reduce both tenure and interest. It is mostly aimed by young generation as it allows to receive higher loan amount and lower payment in initial years.