Fixed vs Floating Interest Rates for Used Car Loan

You may have explored the best prices for the used car you are planning to purchase or may have determined the worth of your trade-in but have you checked which interest rate would be the right choice for your second-hand car loan? The answer depends on many factors. A good interest rate on a used car loan entails a lot more than just having a lower rate. When you take a loan to buy a used car, you may have to choose between a fixed and a floating interest rate. If you are unsure about the differences and which one would be beneficial for you, then read on to know everything about fixed vs. floating interest rates. 
 
Fixed or Floating Interest Rates, Which is Better?  
 
To answer this question, you must have a thorough understanding of fixed or floating car loans.
 
What is a fixed interest rate for used car loan? 
 
This type of interest rate remains fixed throughout the loan repayment tenure and does not fluctuate with the changes in market conditions. It eliminates the risk associated with floating or variable interest rates. As external factors are not involved here, borrowers can know the exact amount for their future EMI payments. 
 
               Also Read: Bag the Lowest Interest Rates on Used Car Loans: A First-Timer’s Guide
 
Advantages of fixed interest rates on used car loans: 
 

• Non-volatile:

Fixed interest rates do not fluctuate in response to market conditions. The market is highly volatile and swings often. Under such a type of loan agreement, the second-hand car loan interest is fixed on the rate that the borrower agreed to for a specific timeframe. It means that your repayments will remain unaffected even if the lending institution raises its interest rates during that time. Therefore, when it comes to used car loan fixed or floating interest rates, most borrowers usually prefer fixed interest rates since they are less volatile.
 

• Certainty: 

Under this loan arrangement, borrowers are aware of their financial obligations from the minute they avail of used car loan financing. As such, they need not be concerned about the market's uncertain conditions.
 
Disadvantages of fixed interest rates on used car loans: 
 

• Higher interest rate: Fixed interest rates on second-hand car loans are usually higher. It prevents you from benefiting from the situation when the market rate falls. When we talk about used car loans fixed or floating interest rates, we will find that fixed interest rates are usually 1% to 2% higher when compared to floating or variable interest rates. 

 

• Attracts Penalty: 

If you want to make additional EMI payments beyond the maximum allowed limit or if you want to prepay your second-hand car loan, the impact could be harsh. Lenders levy penalties on part prepayment and foreclosure of used car loan financing.
 
                              Also Read: How To Get A Second Hand Car Loan In Delhi-NCR
 
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