Floating Rate Loans

Why in news?

• Recently, the Reserve Bank of India (RBI) will introduce a comprehensive framework to enhance transparency and establish proper rules for resetting Equated Monthly Installments (EMIs) for floating rate loans.
• This move aims to address borrower concerns and ensure fair practices by financial institutions.

About Floating Rate Loans:

• Floating rate loans are loans that have an interest rate that changes periodically, depending on a benchmark rate or the base rate.
• This base rate, such as the repo rate - rate at which RBI lends money to financial institutions - is influenced by market forces.
• Floating-rate loans are also known as variable or adjustable-rate loans, as they can vary over the term of the loan.
• Floating rate loans are common for credit cards, mortgages, and other consumer loans.
• Floating rate loans are beneficial to borrowers when interest rates are expected to drop in the future.
• In contrast, a fixed interest rate loan requires a borrower to pay set installments during the loan tenure. It offers a greater sense of security and stability in times of fluctuations in the economy.

PRACTICE QUESTION

Consider the following statements:

1. Floating rate loans are loans that have an interest rate that changes periodically, depending on a benchmark rate.

2. Floating Rate Loans are beneficial to lender when interest rates felled in the future

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement for Statement-I

(c) Statement-I is correct but Statement-II is incorrect

(d) Statement-I is incorrect but Statement-II is correct

Answer