Fixed vs Floating Interest Rates for Used Car Loan

What Is a Floating Interest Rate?

Under floating interest rates for used car loans, the interest rates are subject to quarterly revisions and fluctuate in response to market conditions or the RBI's benchmark index. It is sometimes referred to as a variable rate of interest as it fluctuates throughout a loan obligation.

Advantages of floating interest rates for used car loans

• Lower Interest Rates: Floating interest rates are often lower than fixed interest rates. Therefore, borrowers can save more money on their used car loan financing monthly instalment payments. The interest rates, however, may rise at times, but they will not remain constant throughout the payback period and will eventually fall.
• No Prepayment Penalty: As per the RBI's new directive policy, lending institutions cannot charge penalties for the prepayment of floating rate second-hand car loans. This enables borrowers to pay off their dues quickly, without increasing their repayment obligations.

Disadvantages of Floating Interest Rates for Used Car Loans 

• Uncontrollable: Neither the borrowers nor the lenders influence the variable interest rates. This type of interest rate on a used car loan financing is determined by external factors, and the party involved in the loan agreement has limited options.
• Impacts Budgeting: Even a small increase in benchmark rates can considerably raise the EMI burden for borrowers. At times, floating interest rate loans can make EMI payments challenging; and may impact the borrower's monthly budget.

Also Read: Points to Consider Before Taking a Used Car Loan

Fixed vs. Floating Interest Rate - Key Differences

• Interest Rate

When you apply for used car loans, the first thing that you consider is the interest rate. Fixed interest rates are usually higher than floating or variable interest rates. The difference in interest rates usually ranges between 1% and 2.5%. However, before making any decision on a fixed or floating car loan, keep in mind that floating interest rates are temporary and they keep on fluctuating. 

• Influencing Factors

The fixed interest rate on your used car loan is completely dependent upon your profile. The lender performs a used car loan eligibility check by looking into your income, credit profile, and your used car condition. If these conditions are satisfactory, the lender may grant you a used car loan at a lower interest rate. However, when it comes to the floating interest rates for a used car loan, external factors such as inflation, economic policies, and RBI policies also influence the floating interest rate. Therefore, borrowers do not have much control over floating interest rates.

• EMIs:

When you opt for the fixed interest rate on your used car loans, the EMI remains fixed throughout the loan tenure. However, this is not the case with floating interest rates. The EMI keeps on changing with the change in the interest rate or MCLR/PLR. 

• Budget Planning:

When things remain constant, they are easier to manage. The same applies to fixed interest rates. Borrowers are aware of their EMI from the moment their loan is approved. When compared to variable or floating interest rates, budgeting is much easier with fixed interest rates.

Also Read: Planning to Purchase a Second-Hand Car via Used Car Loan? Here are 5 Questions That You Need to Ask Your Lender

Conclusion

If you compare the advantages and downsides of fixed vs. floating interest rates, you will find that each loan arrangement has its own set of benefits and drawbacks. It is all about your preferences and needs. If you choose a fixed interest rate for used car loans but later discover that a floating rate better suits your needs, speak with your lender about switching to the rate that best fits your budget.