understanding the loan terms while looking for a car loan is very important to make an informed choice. when you apply for a car loan, you would often hear terms like - fixed interest rate loans and floating interest rate loans. the type of interest rate has a significant impact on the overall interest you would pay on your loan. here is everything that you need to know about the fixed vs floating interest rate:
fixed interest rate
when you take a fixed interest rate car loan, the rate of interest remains the same throughout your loan repayment tenure. the interest on fixed interest rate car loans does not change even if there is any change in the lending rates of banks or repo rates by the Reserve Bank of India (RBI). since the rate of interest does not change, the equated monthly installments (EMI) of the loan will also remain the same throughout the tenure.
benefits of fixed interest rate car loans
- the interest rate remains constant throughout the entire loan tenure
- the interest rate is not affected by market conditions
- since the interest rate doesn’t change, the EMI also remains fixed for the entire loan tenure
- fixed EMIs make it easier to plan your monthly budget and other financial decisions
drawbacks of fixed interest rate car loans
- the fixed interest rate loans are usually 1% to 2.5% higher than the floating interest rate
- the fixed interest rate does not reduce for existing loan customers even after the repo-rate cut announced by the Reserve Bank of India (RBI)
- the borrower will have to continue to repay higher interest rates even after an interest rate cut
- many lenders offer fixed interest rate for a couple of years after which it's revised according to the current rate
who should choose a fixed interest rate car loan?
a fixed interest rate car loan would be beneficial for someone who:
- prefers a fixed repayment schedule
- satisfied with the rate of interest at the time of loan disbursal
- foresee a rise in the interest rate in the future
what is a floating interest rate car loan?
when you take a floating interest rate loan, the interest varies with the market scenario. the interest charged on this type of loan will be based on the rate the present repo rate announced by the RBI. when the RBI repo rate increases, the rate of interest may increase, and when there is a decrease in the RBI repo rate, the interest rate on your loan would also decrease.
benefits of floating interest rate car loans
- floating interest rates are usually 1% to 2.5% lower compared to the fixed interest rate
- if the floating interest rate increases, it can still be less than the fixed interest rate as it's anytime 1% to 2.5% lower than the fixed interest rate
- even if the interest rate increases due to market conditions, the floating interest rates might come down after a certain period of time
drawbacks of floating interest rate car loans
- as the rate of interest fluctuates, your car loan EMIs will also vary throughout the loan tenure
- since EMIs are not fixed, it can be very difficult to budget your car loan with other monthly expenses
- if the interest rate increase, you might have to repay interest more than expected
who should choose a floating interest rate car loan?
those who can foresee a dip in the market interest rate in the future can opt for a floating interest rate car loan. this way they can reduce the interest rate in the future and have to pay less to clear off their car loan debt.
the fixed and floating interest car loans have their own advantages and disadvantages. while looking for a car loan, you have to consider your own requirements and eligibility to find out which type of interest rate fits in your budget. you can use the CRED car loan calculator to estimate how much interest you would be paying in different interest rate scenarios.
use CRED car loan calculator