In India, most people hesitate to buy new cars thinking of the financial burden. They fail to think of a car loan as a feasible option. This article speaks of the types of car loans available in the Indian market, thus helping car buyers choose the loan that suits them best. Without actually knowing all about loans, the process can be very cumbersome.
Recently ICICI and HDFC raised the interest rates of auto loans in India. They gave a clear sign that rates would get tougher in future. The two companies, till recently, had special home loan schemes too. Now, these have been discontinued. The Reserve Bank of India had expressed discontentment at teaser rates as it categorizes existing borrowers and new ones separately. Other companies will soon be following the two banks, and, on the whole, car loan rates will be increased by 0.25 to 0.50 per cent. Isn't that a matter of concern? We should know how to intelligently invest in a car by choosing the best type of interest rates on the loans available in the Indian car market.
The Indian car market basically has two types of car loans: fixed and floating. Which one you choose, depends on your capacity to pay back and the risk you're willing to take. During the entire term of loan repayment, your interest rate will remain the same if you opt for the fixed loan. As for the floating interest loan, based on the market condition or the RBI regulations during the particular period, the rate will increase or decrease.
It is advisable to conduct a small research on the market when you plan to take a car loan. In the Indian market, car loans haven't seen a decrease at least in the last five years. They have kept increasing. So, if a person has taken a floating rate loan, he has paid a higher interest every month. The person who had taken the fixed rate loan, on the other hand, has paid the same interest that had initially been agreed upon. However, if you are a strong market player and have positive vibes that the loan rates are going to go south, you can still opt for the floating loan. You have to be ready to take the risk though. If you feel the rates will only increase in future, you can safely settle for a fixed rate loan. As for the floating rate loan, if your predictions go wrong, you will have to bear the extra-high EMIs. So be very careful before finalizing on the type of loan.
There's more about the floating rate loan in the Indian car market. This loan consists of three major components. They are, the effective rate or the actual rate of interest applicable to the car loan taken, the benchmark rate or the reference rate that is greater or lesser than the actual rate and the mark up or mark down rate which is the difference in the effective and benchmark rate. If the effective rate is 14 per cent and the benchmark rate is 11 percent, then the mark up rate is 3 per cent. Loan lenders tend to change the effective rates often by changing any of the other two components. If the benchmark rate goes low, the effective rate or also goes low.
Car loan lenders, however, have their own clever ways. They usually change only the mark up rate while keeping the same benchmark rate. Hence, you will always have a fixed mark up rate during the entire term of your new car loan repayment. In the long run, you end up paying much more than what you initially anticipated. The pre-payment facility too is higher in floating rate loans than in fixed. So, learn the market, take your time and then decide which loan suits you best.
