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Should You Go in for Hybrid Loans (Fixed and Floating Rate)?

By Finserv MARKETS - Apr 4,2019
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Should You Go in for Hybrid Loans

Availing a Home Loan can help you achieve your dream of buying your own house though you have to consider many things before availing a Home Loan like interest rates, tenure, loan amount and so on. Deciding on the nature of your loan is crucial, as money comes into play and the decision has to be made after careful analysis. It is difficult to be correct about market predictions because of its volatile in nature. So, in such cases people opt for hybrid loans.

What are Hybrid Loans?

Loans are primarily of two types – fixed and floating interest rate. A fixed loan is such where the rate of interest remains the same throughout the loan tenure. A floating loan, on the other hand, is dynamic, as the rate of interest changes according to market patterns set by Marginal Cost of Funds based Lending Rate (MCLR). The interest rate in a floating rate can either go down or shoot up but all within the limits set by the market. A hybrid loan is a combination of both fixed and floating. Hybrid loans came into existence because of the fierce competition in the market and banks wanting to attract more customers. The bank clubs both kinds of interest rates in your loan tenure and you pay accordingly. Generally, the loan starts with fixed interest rates and the period is anything between 3-5 years and transcends into floating rates once you have gained financial stability and can bear the cost of high interest rates if and when it goes up.

Process of Hybrid Loans

Upon agreeing to go for a Hybrid Loan, the bank either makes you sign two agreements, one for fixed and one for floating or just one combining and mentioning both elements. With such loans, banks offer you to foreclose the floating component if the interest rates shoot up, with or without any pre-payment fees. And, when the interest rates plummet banks foreclose the fixed interest bit with or without any pre-payment fees. Some banks also offer the option of converting the fixed into floating and vice-versa. In any case, there is always a fee involved in such scenarios that can be negotiated with the bank.

Important Point to Keep in Mind

Before opting for a hybrid loan keep in mind that in the floating component there is a margin and cap that is applicable to the borrower.  If both the numbers remain low, there is nothing more profitable like a hybrid loan if the rate of fixed interest suits your repayment ability.

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522