Most people in this country buy cars on loan. Banks offer various interest rate options to their customers when it comes to car loans. There are fixed rates and floating interest rates. Most banks offer both types of loans to customers. Let us know how to choose from both fixed and floating interest rates.
Learn Differences between fixed and floating interest rates.
It is the dream of every person to buy a car. Most people in the country buy cars on loan and repay that loan monthly through Equated Monthly Installments (EMIs). When it comes to car loans, banks offer various interest rate options to customers.
Bank gives two types of loans.
Private banks usually offer car loans at fixed interest rates, while public banks offer car loans at floating interest rates. However, some banks provide loans at both fixed and floating rates.
IDFC First Bank, IDBI Bank, Punjab National Bank, and some other banks offer both loan options. Let us tell you that the Bank of Baroda has recently introduced car loans at a fixed rate, which earlier used to give car loans only at a floating rate.
What is fixed rate and floating rate?
A fixed-interest rate loan is a loan where the interest rate does not fluctuate during the fixed-rate tenure of the loan. At the same time, the banks revise the floating interest rate every quarter.
How to choose Fixed and Floating interest rates?
Loan tenure is another factor to consider when deciding between floating and fixed-rate loans. If the loan tenure is small, say your loan is for three years, a significant portion of the EMI will go towards principal repayment right from the start, so a difference of 0.5 to 1 percentage point under a floating loan rate may make little difference.
For long-term loans, a significant portion of the EMI in the first half of the repayment tenure goes towards paying interest and a smaller percentage towards principal repayment. Thus, a change in the interest rate in the initial years can significantly impact your loan liability. Considering all these situations, experts believe one should opt for a car loan with a fixed interest rate for a shorter tenure.
What is the difference in interest rates between the two?
For short-term loans, the difference in interest rates on fixed and floating loans is slight. Fixed rates can be 5-10 basis points lower than floating rates.
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What is loan prepayment, penalty, and terms?
There is one more factor to consider while choosing a fixed-rate car loan. Unlike floating-rate loans, which have no prepayment penalties, fees or conditions may be to prepayment or complete payment of a fixed-rate loan before a specific minimum term.
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