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How will the car loan scenario impact you?

Last updated on: May 12, 2011 13:59 IST

How will the car loan scenario impact you?

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Even before RBI increased its policy rates, State Bank of India, increased the base rate by 25 bps.

The base rate as of now stands at 8.5 per cent for SBI. This is not really surprising for people who have been keenly following the RBI and other banks since the past 1 year.

Also, SBI did not increase its rates in March 2011 when RBI increased the policy rates by 25 bps.

Since RBI raised the policy rates by 50 bps recently, we can expect banks to follow suit and increase the interest rates but it may not happen immediately.

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Image: Possible hike in interest rate will impact car loan borrowers.
Photographs: Reuters
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How will the car loan scenario impact you?

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The possible hike in interest rate will impact car loan borrowers heavily. A hike of 50 bps by RBI on top of an already high repo rate is a double whammy for borrowers.

Not only does it make the cost of borrowing expensive but can also make people postpone their purchases.

These two events will shape the interest rate of other banks.

In the case of SBI, the car loan is currently at 2.25 per cent premium over the base rate, effectively making it 10.75 per cent.

The maximum payback period has been fixed at seven years. This was before the RBI review meeting on 3 May, 2011.

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Image: Car loan is at 2.25 per cent premium over the base rate.
Photographs: Reuters
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How will the car loan scenario impact you?

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Now that RBI has announced its intention to raise the rate by 50 bps, most of the lenders will increase their car loan rates very soon.

SBI, however, did waive off the pre-payment penalty. This is a good step as prepayment penalty was one area where banks and borrowers did not see eye to eye.

Prepayment penalty was an unnecessary burden on borrowers who wanted to pay off their loans early.

An increase of 50 bps by RBI was a shocker despite the fact that most of the experts and economists knew that this would be RBI's step to tame inflation.

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Image: SBI has waived off pre-payment penalty.
Photographs: Reuters
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How will the car loan scenario impact you?

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Following is the car loan schemes offered by various banks:

Bank of Baroda offers 12 per cent for below 15 lakhs, 12.5 per cent for above 15 lakhs.

Maximum of 7 years with 0.5 per cent rate discount if borrowers deposit liquid securities as collateral.

Further 0.25 per cent if the home loan borrowers have good record of repayment.

SBI Car loan scheme offers 10.75 per cent.

Maximum of 7 years with no prepayment penalty, 85 per cent finance and overdraft facility by paying 0.5 per cent extra interest rate.

HDFC car loan scheme offers on case basis maximim of 7 years, with up to 100 per cent finance, up to 3 times of the salary (for salaried professionals) and 6 times the annual income (for self employed professionals).

ICICI Car loan scheme offers on case basis maximum of 5 years, with up to 90 per cent of car value, with fixed rate option only, approved within 24 hours and prepayment fee of 5 per cent.

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Image: Different schemes are offered by banks.
Photographs: Reuters
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How will the car loan scenario impact you?

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These rates are for the period before the policy review meeting took place.

Hence there a definite possibility that the interest rates on car loan could go up further eventually.

The banks are probably waiting and watching to see how the lending arena shapes up before rushing to increase their rates.

As such the rates are on the higher side and there is also the fear that any further increase could work against the banks in terms of driving away potential customers.

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Image: Car loans can go up further.
Photographs: Reuters
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How will the car loan scenario impact you?

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Car loan rates have increased and hence it is more important now than ever to do the due diligence on rates and compare different options.

Some of the steps customers can take are the following:

i) You can search online to get quotes from various banks, compare, and find the best deal.

ii) A few banks give extra discount if you have taken a home loan from them and have been repaying your EMIs consistently. Use this feature.

iii) Lastly, try to make a higher down payment. The interest burden will drastically reduce.


Image: Customers should compare different options.

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