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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Debt Management and Loans

Under the usual lending practice described for personal loans, which of the following best describes a 'floating rate' home loan?

A floating rate home loan carries an interest rate linked to an external benchmark and it resets when the benchmark changes, according to the loan agreement. This differs from a fixed rate loan, where the rate stays constant for the agreed period regardless of market movements.

  1. AThe interest rate is fixed for the entire tenure regardless of market changes
  2. BThe interest rate is linked to an external benchmark and resets when the benchmark changes, as per the loan agreementCorrect
  3. CThe EMI amount can never change while the rate changes
  4. DThe interest rate is charged only on the principal repaid so far

Explanation

A floating rate loan is linked to a benchmark (such as the repo rate) and the lender's rate resets as per the agreed reset clause. A fixed rate stays unchanged for the fixed period. Floating loans do not charge interest only on repaid principal.

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