Signs of a turnaround in the rising interest rate cycle
The country’s largest public sector bank, the State Bank of India (SBI), announced on December 17, 2021 that it had raised its key rate by 10 basis points (bps), marking the beginning of the end of the regime. low interest rates. In addition to being a benchmark rate for borrowers, the base rate also serves as an indicator of the direction of the overall interest rate in the economy.
A hike in the base rate indicates that the downtrend in interest rates is finally reversing and that in the future we may see a few more interest rate hikes. Crude oil (WTI) prices after falling to $ 65 in early December have now risen to nearly $ 73 on December 23, indicating a 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 of time and remains manageable, then with a double-digit increase in the WPI (Wholesale Price Index) in India, which could have a later ripple effect on the CPI (consumer price index), the probability that the RBI will hike the rate in the near future cannot be excluded.
Auto loan and personal loan at a fixed rate
Much of the personal loans available at a fixed rate comes in the form of auto loans and personal loans. Although not all lenders offer these fixed rate loans, quite a few do. “Public sector banks usually offer personal loans with floating interest rates, while most private sector banks and NBFCs offer personal loans with fixed interest rates,” says Sahil Arora, senior manager of Paisabazaar. .com.
The story is similar when it comes to auto loans. “While most PSU banks offer auto loans at variable interest rates, the State Bank of India offers auto loans at fixed interest rates. Private sector banks and NBFCs typically offer auto loans at fixed interest rates, ”says Arora.
* Additional interest rate concession of 0.20% on the purchase of an electric vehicle (Green Car Credit)
** 0.25% interest rate concession for existing home loan borrowers and company payroll account holders. 0.05% reduction on the interest rate for women and armed forces personnel subject to a minimum ceiling of RLLR.
Fixed rate vs variable rate taken from respective bank websites
Rates and charges as of December 16, 2021, Source: Paisabazaar.Com
How Fixed Rate Loans Can Save Interest
Over the long term of 5-7 years, which is usually the case with personal loans and auto loans, if the interest rate starts to rise, a fixed rate loan will help you save an amount of. important interest.
If you compare a car loan of Rs 10 lakh at a fixed interest rate of 7.5% and a floating interest rate with a starting rate of 7.5% but with a 0.5% increase in interest, within 5 years your interest output will only be Rs. 2.02 lakh in the fixed rate option while it will be Rs 2.20 lakh in the variable rate option. If the interest rate hike is more than 0.5% in the first few years, the interest expense could be much higher.
The decision to opt for a fixed rate loan will be more advantageous when 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 typically 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 rates between lenders, you can easily find many lenders offering 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%. Likewise, Federal Bank’s minimum floating rate on its auto loan is 8.5% while you can get fixed rate loan from HDFC Bank at 7.95%.
Likewise, you can get a fixed rate personal loan from SBI at 9.6% if you have a salary package account with the bank. You will have to pay a minimum interest rate of 10.5% if you opt for 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 auto loan and personal loan option that is right for you.
Use a personal loan instead of a higher rate used car loan
If you are considering taking out a used car loan, you should consider all of your options critically. “Lenders charge higher interest rates on used cars because the credit risk associated with used car loans is higher than with new cars. Interest rates for used car loans 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, we 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 used car loans. Therefore, those who are considering purchasing used cars through loans may also consider take advantage of 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. “Since 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 period, ”explains Arora.