Hitch a ride on a fixed-rate car loan and shield yourself from another hike

But lenders can impose restrictive conditions on prepayment and foreclosure

Interest rates on car loans have moved up after the 90-basis point (bp) increase in repo rate by the Reserve Bank of India (RBI) over the past two months. Borrowers should lock into a fixed-rate car loan now before rates inch up further.  

Fixed and floating options available

Both fixed- and floating-rate options are available.

“Most public-sector banks offer car loans at floating interest rates, while most private-sector lenders offer fixed rates. A few lenders offer both,” says Sahil Arora, senior director, PaisaBazaar.

Experts say a fixed-rate loan makes more sense in the current scenario.

“Interest rates are expected to rise over the next 18-24 months. It’s advisable to go for a fixed-rate car loan to avoid shocks from increasing equated monthly instalments (EMIs) in the coming months,” says Arvind A Rao, certified financial planner and founder, Arvind Rao & Associates.

According to Pankaj Bansal, chief business officer, BankBazaar, “A fixed-rate car loan makes sense since the rate remains fixed for the entire tenure.”

The maximum tenure goes up to eight years.

Beware of foreclosure charges

Buyers opting for a fixed-rate loan should be aware of one downside.

“The RBI has barred lenders from levying a prepayment or foreclosure fee on car loans given on floating rates. But lenders have the discretion to levy these fees in the case of a fixed-rate car loan,” says Arora.
 

Lenders also sometimes impose restrictive conditions on prepayment and foreclosure.

“Such restrictive conditions will reduce the scope of benefits arising from making prepayments on your automobile loan,” adds Arora.

Pre-owned car loans are costlier

With car prices rising over the past year and interest rates also headed north, many buyers are likely to go for pre-owned vehicles.

“While the interest rate on a new car loan may begin from around 7 per cent, the starting rate for a used-car loan is higher – around 11 per cent. A used car poses a higher asset risk to the lender, and hence it needs to charge a premium,” says Manish Chaudhari, president and chief of staff, Poonawalla Fincorp, which offers fixed-rate loans for used-car purchases.

Each lender has its own method of valuing a used car.

“The loan sanctioned will depend on the evaluation done by the lender,” says Chaudhari. Hence, it could vary from lender to another.

Chaudhari suggests that before entering into a deal, used-car buyers should check whether the previous owner has an outstanding loan on the vehicle.

Compare more than just interest rate

If you get tied down to the offers available in the dealership, you may not get the best loan, so shop around.

“Compare interest rates, processing fees, and loan-to-value ratios from various lenders,” says Arora.

In addition, also check out the other terms and conditions, such as those related to prepayment and foreclosure. 

“Go with a lender whose conditions are less restrictive,” says Bansal.

Arora suggests starting your search from banks and non-banking financial companies with whom you already have a relationship.

“Next, contact captive car finance companies, if available, as they might offer lower rates. Finally, visit online financial marketplaces to compare loan features,” he says.

When you close the loan, you will have to get the lien cancelled.

“Go with a player that has a reputation for high standards of service and will help you in getting the lien transferred,” says Bansal.

Potential borrowers should avoid overleveraging in a rising-rate scenario.

“The sum total of all your EMIs should ideally not exceed 40 per cent of your take-home salary. And it should definitely not cross the 50 per cent mark,” says Bansal.

In the current scenario of rising rates, borrowers must also keep an eye on their credit scores.

“A credit score of above 750 is considered good. Those having such a score usually have a higher chance of loan approval, and increasingly, of getting a lower interest rate,” says Arora.