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Tuesday, February 13, 2018

What are fixed and floating interest rates ?

Fixed means that the interest rate is fixed for a period of time or the entire tenure of your loan or term deposit.

Housing Loans can be typically fixed for one, two or three years in Fiji and personal loans are usually fixed for the entire term.

A fixed rate is the best option for a borrower or depositor because it delivers certainty of interest income on term deposits and certainty of loan repayment amounts.

Floating (sometimes called a Variable Rate) means that the bank or lender can change the interest rate by giving you notice in writing or by advertising the change in the newspapers.

This is a risky proposition for a borrower as the bank or lender might increase the repayments to a higher amount after you have received the loan.

By offering a floating rate loan or deposit, the bank or credit institution is essentially asking their customer to take on the interest rate risk rather than taking the risk themselves.

Our recommendation then is always to avoid floating rate loans and deposits and to choose fixed rate offerings as consumers are less well equipped (than banks or credit institutions) to make decisions about rates or to speculate on whether they are likely to go up or down in the future.

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