Fixed vs Floating Rates on Car Loan

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Today, it has become a dilemma for a borrower to choose between Fixed Vs Floating Rates on Car Loan along with the features and combinations that are being offered by banks and NBFCs on every kind of loan. Competition among banks and financial institutions has led to the development of attractive loan products. One such Fixed Vs Floating Rates on Car Loan

Accessibility of different products makes it hard for a client to pick a product that accommodates his/her spending plan, the best. There is a need to do some research and contrast the item all together to get the best car loan. There are two sorts of interest rates offered on car loans: fixed and floating rates.

Differences: Fixed vs Floating Rates on Car Loan:

Floating interest rates loan is that type of loan whose interest is computed as per the existing Floating Reference Rate(FRR), which is the benchmark used by all banks to price their floating-rate loans. This rate may vary periodically.

Floating interest rates has 3 components:

  1. Effective Rate: It is the actual rate applicable to a loan.
  2. Benchmark Rate:  It is only a reference rate which is less than the actual rate.
  3. Mark up and MarkDown: It is the difference between the benchmark and the actual rate.

In a fixed interest rate loan, the Car Loan Interest Rate remains constant throughout the whole tenure irrespective of changes in the benchmark rate.

Let’s assume that the effective rate is 14 per cent and the benchmark rate is 12 per cent. Therefore, the markup rate becomes 2 per cent.

Usually, banks change the effective rate by changing the benchmark rate or mark up rate. In case, the bank reduces the benchmark rate by 1 per cent then the effective rate will drop by 1 per cent. Now the effective rate will be 13 per cent i.e. benchmark rate (11) plus markup rate (2).

Similarly, the bank can also change the interest rates by changing the markup rate by 1% when the benchmark remains the same. Now the effective rate will be 13% i.e. benchmark rate (12) plus markup rate (1). Normally, the interest rate drops are one by changing the markup rate only.

Factors to consider while choosing the type of loan:
  • Those who wish to maintain a steady payment should avail a fixed interest rate car loan
  • Those who are ready to take the risk, the prediction of the trend of interest rates in the future years is the basis of consideration. If there is the possibility of an upward trend in the interest rates, then it is better to stay locked in a fixed-rate loan. If trends show a downward shift in interest rates, then opting for a floating type may be profitable in the long run.

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