Signs of an upward interest rate cycle reversal
The country’s largest public sector bank, the State Bank of India (SBI), announced on December 17, 2021 that it had raised its policy rate by 10 basis points (bps), signaling the start to the end of the regime. low interest rates. In addition to being a reference rate for borrowers, the base rate also functions as an indicator of the direction of the overall interest rate in the economy.
A rise in the base rate indicates that the downward trend in interest rates is finally reversing and that in the future we may see some more interest rate hikes. Crude oil (WTI) prices after falling to $65 in early December have now risen to almost $73 on December 23, indicating the recovery in global demand. If the impact of the Omicron variant of the coronavirus on the global economy does not extend over a long period and remains manageable, then with a double-digit rise in the WPI (wholesale price index) in India that could later have a knock-on effect on the CPI (Consumer Price Index), the likelihood of the RBI raising the rate in the near future cannot be ruled out.
Auto loan and fixed rate personal loan
A good portion of the personal loans that are available at fixed rates come in the form of car loans and personal loans. Although not all lenders offer these fixed rate loans, a good number do. “Public sector banks generally offer personal loans at floating interest rates, while most private sector banks and NBFCs offer personal loans at fixed interest rates,” says Sahil Arora – Senior Manager, Paisabazaar .com.
The story is similar with auto loans. “While most PSU banks offer car loans at floating interest rates, State Bank of India offers car loans at fixed interest rates. Private sector banks and NBFCs generally offer car loans at fixed interest rates. fixed interest rates,” says Arora.
* Additional interest rate of 0.20% on the purchase of an electric vehicle (Green Car Loan)
**0.25% interest rate concession for existing home loan borrowers and corporate payroll account holders. 0.05% interest rate reduction for women and armed forces personnel subject to a minimum floor cap of RLLR.
Fixed vs floating rate taken from respective bank websites
Rates and charges as of December 16, 2021, Source: Paisabazaar.Com
How Fixed Rate Loans Can Save Interest
During the long term of 5 to 7 years, which is usually the case with personal loans and car loans, if the interest rate starts to rise, a fixed rate loan will help you save a significant amount of interest. .
If you compare a car loan of Rs 10 lakh at a fixed interest rate of 7.5% and a variable interest rate with a starting rate of 7.5% but with an increase of 0.5% from interest, within 5 years, your interest will be only Rs 2.02 lakh in the fixed rate option while it will be Rs 2.20 lakh in the variable rate option. If the rise in interest rates is more than 0.5% in the first few years, interest expenses could be much higher.
The decision to opt for a fixed rate loan will be more advantageous if you are selective in the choice of the lender and the interest rate. “As fixed rate loans carry a higher interest rate risk for lenders, they generally charge higher interest rates on fixed rate loans than on variable rate loans to cover the higher risk. “, explains Arora.
However, when you compare the interest rate between lenders, you can easily find many lenders offering a fixed rate loan at competitive rates. For example, Canara Bank’s lowest interest rate on a variable rate auto loan is 7.30%, while you can get SBI’s fixed rate loan at 7.25%. Similarly, the Federal Bank’s minimum variable rate on its car loan is 8.5%, while you can get a fixed rate loan from HDFC Bank at 7.95%.
Similarly, you can get a fixed rate personal loan from SBI at 9.6% if you hold a salary package account with the bank. You will have to pay a minimum interest rate of 10.5% if you take out a variable rate personal loan from Bank of Baroda, according to its website. So if you do your research, you can easily find a lower fixed rate car loan and personal loan option that’s right for you.
Using a Personal Loan Instead of a Higher-Rate Used Car Loan
If you’re considering taking out a used car loan, you need to carefully consider all of your options. “Lenders charge higher interest rates on used cars because the credit risk associated with used car loans is higher than with new cars. Car loan interest rates Used vehicles typically range from 8.75% per year to 16% per year, depending on the condition, age and segment of the car,” says Arora.
Instead of opting for a user car loan, one can think of using a personal loan to finance the purchase of the vehicle. “Some banks and NBFCs actually charge lower interest rates on their personal loans than on used car loans. Therefore, those who are considering buying used cars through loans can also consider taking out a personal loan,” says Arora.
In addition, a personal loan can allow you to obtain a higher amount of financing than a used car loan. “As lenders typically finance up to 70% of the value of a used car through a car loan, using a personal loan to finance a used car can allow them to benefit from a larger loan amount for a longer term,” says Arora.