Business Loan · Question

What is the difference between a fixed and a floating interest rate?

Short answer

A fixed rate stays unchanged for the period the lender has agreed to hold it, so your instalment is predictable. A floating rate moves when the lender's reference benchmark changes, so the instalment, or the remaining tenure, can shift over time. Fixed buys certainty, often at a higher starting cost. Floating usually starts lower but carries the risk of upward movement.

In more detail

A fixed rate is set when the loan is sanctioned and does not move for the agreed fixed period. Read the clause on what happens when that period ends, because many agreements allow a reset to the then-prevailing rate rather than holding it for the whole life of the loan.

A floating rate is built from a reference benchmark plus a spread, which is the margin the lender adds for your risk profile. When the benchmark moves, your rate follows after the next reset date written into the agreement. The spread normally stays put unless the lender formally reassesses your credit profile.

When a floating rate rises, the lender either raises your instalment or lengthens the remaining tenure. Ask which method applies. Lengthening keeps the monthly outgo steady but means you pay interest for longer.

Fixed and floating at a glance
Aspect	How the two compare
Instalment certainty	Fixed holds steady during the fixed period; floating can change at each reset
Typical starting cost	Fixed is often higher; floating is often lower or similar
When market rates fall	Fixed benefits only at reset; floating passes it through after reset
When market rates rise	Fixed is protected for the period; floating costs more after reset

A packaging unit decides

A hypothetical packaging unit has steady monthly contracts but thin margins. A sudden rise in instalments would squeeze payroll, so it accepts the higher starting cost of a fixed rate in return for a stable repayment plan.

Floating can still make sense when margins are comfortable and you expect to repay early. Whatever you choose, ask the lender to show the instalment under a rise in the benchmark and compare it with your monthly surplus.

Key points

A fixed rate gives instalment certainty for a stated period, not always for the entire loan.
A floating rate follows a benchmark plus a lender spread, and resets on dates set in the agreement.
When rates rise, lenders may increase the instalment or extend the tenure; ask which applies.
Choose by how much movement your monthly cash surplus can absorb, not only by the starting cost.

Who this applies to

Borrowers comparing offers where the same lender or different lenders quote both rate types.
Owners with thin margins who value predictable monthly outgo.
Businesses planning early repayment who may be comfortable with movement.

Last reviewed 3 October 2026

This answer is general information, not advice on your particular case. Terms, eligibility, and requirements change, so check the current position with the relevant institution or authority. Lalsar Holdings' financial advisory and financing work is advisory and facilitation only. Lalsar Holdings is not a lender. Sanction and disbursement of any credit facility is at the sole discretion of the partner bank, NBFC, or financial institution involved, subject to their own eligibility criteria and credit policy.