Today, it has enhanced a dilemma for a borrower to determine between Fixed Vs Floating Rates on Car Loan along with the characteristics and combinations are given by banks and NBFCs on every kind of loan. Competition between banks and financial organisations has led to the development of engaging loan products. One such Accessibility of various products makes it hard for a customer to pick a product that fits his/her spending plan, the most useful. There is a need to do some research and contrast the item to get the best car loan. There are two kinds of interest rates offered on car loans:
fixed and floating rates.
Fixed vs Floating Rates on Car Loans:
Floating interest rates loan type of loan whose interest is computed as per the existing Floating Reference Rate(FRR) is the benchmark used by all banks to price their floating-rate loans. This rate may vary periodically.
Floating interest rates has three components:
- Effective Rate: It is the real rate relevant to a loan.
- Benchmark Rate: It is only a reference rate, which is less than the real rate.
- Mark up and MarkDown: It is the distinction between the benchmark and the actual rate.
In a fixed interest rate loan, the Car Loan Interest Rate remains constant throughout the tenure, irrespective of changes in the benchmark rate.
Let’s imagine that the effective price 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 status. If the bank decreases the benchmark rate by 1 per cent, then the effective rate will fall by 1 per cent. Now the effective price will be 13 per cent i.e., benchmark price (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. The effective rate will be 13% i.e., the benchmark rate (12) plus markup rate (1). Usually, the interest rate drops are one by changing the markup rate only.
Factors to think while determining the type of loan:
- Those who wish to maintain a steady payment should avail of a fixed interest rate car loan.
- Those who are willing to take the risk, the prediction of the course of interest rates in the future years is the basis of evidence. If there is the chance of an upward trend in the interest rates, then it is enough 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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