Fixed rate loan
A loan whose interest rate stays the same for the entire tenure, fixed at the time of borrowing — useful for locking in a low rate, as against a floating rate loan whose rate resets with a benchmark.
In plain language
A loan can charge interest in one of two ways. The rate can stay the same for the whole loan. Or it can move up and down as the market moves.
A fixed rate loan is the first kind. The interest rate is locked in on day one. It stays at that level for the entire tenure of the loan. The borrower knows exactly what each EMI will be, for as long as the loan runs.
This certainty has a cost. If market rates fall after the loan is taken, the borrower still pays the old, higher rate. A floating rate loan moves with the market instead, for better or worse.
How it works
A fixed rate loan works best when interest rates in the economy are already low, and the borrower wants to lock into that low rate — say 9% on a 20-year loan — before it rises again; the workbook names this as the main reason to choose one.
The trade-off sits with the lender, not the borrower. If market rates rise after the loan is disbursed, the bank's own cost of funds goes up while the loan still earns only the old, fixed rate — squeezing the lender's margin. This is why banks in India increasingly prefer to offer floating rate loans, where a rate reset passes that risk back to the borrower, rather than fixed rate loans for long-tenure borrowing such as home loans.
A worked example
Rohan borrows Rs 30,00,000 over 20 years to buy a flat. A fixed rate loan at 9% p.a. works out to an EMI of about Rs 26,992, unchanged for all 240 months, whatever happens to interest rates in the economy afterwards.
A neighbour who instead takes a floating rate loan on the same amount and tenure starts lower, at 8.5%, with an EMI of about Rs 26,035. Two years later, rates in the economy rise and the benchmark pushes his loan to 10.5% — his EMI jumps to about Rs 29,951, nearly Rs 4,000 more a month, while Rohan's fixed EMI has not moved at all. Had rates instead fallen, the position would have reversed, with the neighbour benefiting and Rohan locked into paying more than the market rate.
Why NISM asks about it
Chapter 4 (Debt Management and Loans), section 4.7.1 (Fixed Rate Loans), defines the term immediately before variable/floating rate loans in section 4.7.2, and section 4.13 returns to the choice between the two when discussing how a borrower should respond to interest rate changes. Expect a question distinguishing fixed from floating rate loans, or one asking which type suits a borrower who expects rates to rise.
Common exam traps
- A fixed rate loan is not automatically the safer choice. It protects the borrower only if rates rise after the loan starts; if rates fall, a floating rate loan would have been cheaper.
- Banks now largely push floating rate loans, precisely because a fixed rate loan leaves the lender exposed if market rates move up — do not assume fixed rate loans are always freely available or preferred by the lender.
- Do not confuse this with a loan linked to an external benchmark like the repo rate, which is the definition of a floating rate loan, not a fixed one.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- Debt reschedulingA change to the terms of an existing loan — a lower EMI, a longer tenor, or a lower rate — agreed with the lender when a borrower can no longer service it as originally structured.
- EMIThe Equated Monthly Instalment — the fixed monthly payment on a loan that covers both interest and a portion of the principal, calculated so the loan is fully repaid by the end of its term.
- Floating rate loanA loan whose interest rate is reset periodically in line with the benchmark it is linked to — such as the repo rate or a bank's MCLR — so the EMI or tenure changes as rates move.
- Home equity loanA loan against property, or LAP, where the borrower pledges their own home as collateral to raise funds for any purpose, capped by the property's value and the lender's advance rate.