What are the parameters?you consider when looking for a car loan? Mostly, rate of interest, tenure, processing fee, prepayment charges and of course the total cost of the loan, at the most. If you are planning to buy a car this festival season, there are a number of mouth watering offers in the market?vying for your attention. Recently a number of banks cut their lending rates on various loans, including car loans. Thanks to the festival season, among other reasons.
The interest rate which SBI offers for new cars is 10.50 percent per annum. They also give a discount on processing fee, though this discount is valid until 31 December. Reuters
What?s on offer: A quick online search at loan aggregator website will show that SBI does really offer the cheapest loan as far as interest rate offering goes, at 10.50%.? There are banks such as State Bank of Hyderabad (SBH), which offers 10.50% as well and Bank of Maharashtra (BoM) offering 10.55%. Union Bank of India offers 10.9%. Sundaram Car Finance, Indian Bank and Reliance Consumer Finance offers 11%. Among private sector banks, such as HDFC Bank, are charging 11.5% to 16.5%. ICICI Bank?s stand at 11.5% to 14.5%. The number of options can be mind boggling.
Most important parameter:?So why such a big difference between these banks rates? Among other things, one aspect to keep in mind is that SBI, SBH and BoM loans are floating interest loans. The loan is linked to bank?s base rate, and any change in the bank?s base rate will change the rate you pay. While the other loans mentioned above are fixed rate loans. But you hardly think between the options of fixed verses floating rates. Common knowledge says when it comes to car loan, fixed is better than floating. But that?s a general rule, and general rules break themselves under certain conditions.
For instance, let?s take SBI. The interest rate which SBI offers for new cars is 10.50 percent per annum. They also give a discount on processing fee, though this discount is valid until 31 December. The processing fee is 0.255% of the loan amount, subject to a minimum of Rs.510 and a maximum Rs.5100. Also, they do not charge a prepayment penalty. And, the maximum loan tenure up to for 84 months or 7 years.
So, since SBI is a floating rate loan, does it mean you should not go for it? Common knowledge tells us not to, but experts think differently. Kartik Jhaveri, a Mumbai-based Certified Financial Planner, says, ?If you look at the present market conditions, interest rates have a possibility to fall more than they are expected to rise. So, choosing a floating rate loan will ensure that the rate decreases when the next rate cut happens.? Of course, he also says that in a rising interest rate scenario,(which is not the case now) this would have been a terrible choice. But now that the rates are falling, you could make the most of it under certain conditions.
What?s the condition:?Vivek Rege, another Mumbai CFP, echoes Jhaveri?s views. He says, ?If you are planning to take a car loan for a short term of say three years, a floating rate like SBI loan is a good idea.?
Of course, taking a floating rate loan for more than three years is not wise. He said, ?If you are planning for more than three years, go for a fixed rate loan. After all in the seven years, the rate cycle could change a couple of times.? SBI is currently offering the highest tenure of seven years. But you can choose lower tenure as well, with them.? Floating rate loan for longer tenure is definitely a no-no. But for a shorter duration, SBI seems like a good bet. Especially, since SBI does not charge a prepayment penalty.
If you plan to go for a longer term loan, check out the fixed rate loans. This will ensure that through out the tenure you will need to pay a fixed rate of interest. After all, for a longer term, who knows how many times the interest rate cycles will turn.
End Note:?As they say, principles are made for men and not men for principles. Sure, financial planning says when it?s a car loan, fixed is better then floating, but you should apply thumb rules only after looking into prevailing economic conditions. The RBI yesterday cut cash reserve ratio, and most expect the apex bank to cut policy rates in January. And by then real rates will surely start falling. So, do make the most of this festival season, choose the right type of rate (fixed or floating) based on the tenure of your loan. And do check the other same old same old parameters of processing fee and prepayment charges.
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