Understanding Loan Interest Rates (2025): Fixed vs Floating, APR & How to Compare
Learn how loan interest rates work, what affects your rate, fixed vs floating, and how to compare offers using total cost and APR. Updated for 2025.
What you’ll learn
This guide explains what loan interest rates mean, how banks set them, fixed vs floating rates, APR vs nominal rate, and how to compare offers without missing hidden costs.
A loan’s interest rate directly impacts your EMI and total repayment. But the “lowest rate” isn’t always the cheapest deal—fees, tenure, and rate type can change the true cost.
What is an Interest Rate?
An interest rate is the cost of borrowing money, usually expressed as an annual percentage (e.g., 10% p.a.). Your lender charges interest on the outstanding principal.
Key terms:
- • Nominal rate: The stated rate used to compute interest
- • APR / effective cost: Rate adjusted for fees (often more realistic for comparison)
- • Reducing balance: Interest applies on remaining principal (common for EMIs)
Fixed vs Floating Interest Rates
Fixed rate (or fixed for a period)
- • EMI is predictable
- • Good when rates are expected to rise
- • Sometimes slightly higher than floating
Floating rate
- • Can go up or down based on benchmark rates
- • Often starts lower than fixed
- • Changes can affect EMI or tenure (depends on lender)
Tip
For long-tenure loans like home loans, understand whether the lender changes your EMI, your tenure, or both when rates change.
What Affects Your Loan Interest Rate?
- Credit score: Higher score generally qualifies for better pricing.
- Income & stability: Stable income reduces risk.
- Loan amount & LTV: Higher LTV can mean higher risk and rate.
- Tenure: Longer tenures can increase total interest, sometimes affects pricing.
- Market rates: Benchmark changes influence floating-rate loans.
Watch outs when comparing offers
- • High processing fee that offsets a slightly lower rate
- • Foreclosure/part-prepayment charges (especially on personal loans)
- • Add-on insurance bundled into the loan amount
- • “Teaser” rates that increase after an initial period
Calculate the Impact on EMI
Even a small rate difference can change the EMI and total interest significantly over long tenures.