Home Finance What are fixed and floating interest rates on used car loans?

What are fixed and floating interest rates on used car loans?

25
0
What are fixed and floating interest rates on used car loans?
What are fixed and floating interest rates on used car loans?

Are you planning to get a used car loan to buy your dream car? If so, you will need to choose an interest rate that serves you well, as it directly impacts your EMIs. Getting a higher interest rate would increase your EMI, making it difficult to make on-time monthly repayments. 

When you apply for a used car loan, you will have the choice to choose between a fixed and floating interest rate. But, which is beneficial for you based on your preferences? Read of to know more about the two second-hand car loan interest rates.

Fixed interest rate 

As the name suggests, a fixed interest rate on used car loans remains the same throughout the loan tenure. It remains constant even if there is any change in the repo rates of the Reserve Bank of India (RBI). Since there is no change in interest rate, the EMI amount remains the same too. Your lender may offer a fixed second-hand car loan interest rate only for few first years of the loan tenure and then switch to a floating interest rate. 

Advantages of having a fixed interest rate 

Here are the benefits of having a fixed interest rate: 

  • The second-hand car loan interest rate remains the same throughout the loan tenure. It does not change even there is any change in the market condition.

  • The best part is that the EMI remains constant too, which means you can make repayments without constraining your monthly budget or touching your savings. 

Disadvantages of having a fixed interest rate

Here are the benefits of having a fixed interest rate on your used car loan: 

  • The fixed interest rates are generally 1% to 2.5% higher than the floating interest.

  • Another drawback is that even if the RBI decreases the interest rate, you will have to continue repayment at the interest rate agreed initially, which is higher.

  • At times, a fixed interest rate is valid for a few years after which it will be revised as per the ongoing rate. 

Floating interest rate

The floating interest rate changes with the market condition. It is calculated based on the base rate. Whenever the rate changes, the floating rate also changes. A floating interest rate best suits when you have a longer loan tenure. 

Advantages of a floating interest state

Here are the benefits of having a floating interest rate on your used car loan: 

  • A floating interest rate is generally lower than a fixed interest rate by 1% to 2.5%.

  • A floating interest rate is usually lower than a fixed interest rate. So, even if the floating interest rate increases, it remains lower than the previous fixed interest rate offered by the bank and non-banking financial institutions.
  • Even if the floating interest rate increases, it will remain high for a long time. It will decrease after a certain time, depending on the market condition.

Disadvantages of a floating interest rate

  • Since the floating interest rate keeps changing, the equated monthly installments (EMI) will also vary throughout the repayment tenure.

  • Due to the changes in EMIs, it is difficult to budget a loan with a floating second-hand car loan interest rate.
  • When the interest rate increase, you may find it difficult to pay your EMI. You may have to use your savings to make repayments. 

Conclusion 

So, second-hand car loan interest rate works for you? The answer depends on the loan tenure you have chosen. If you are opting for a shorter loan tenure, you may want to opt for a shorter loan tenure. Or else, it is always better to go for a floating interest rate for a longer loan tenure.