Keys to a Bumpy-Free Ride Lies in Car Loan Interest Rate

A car is a dream as well as a need, don't you think so. You can't deny the fact that there is always a sense of something missing when you are travelling in a crowded metro or a bus to reach your office. This is where you think, Kaas Apna Bhi Ek Car Hota. So, what should you do to encash your car dream? In my view, a successful car acquisition lies in the accumulation of the money to pay for down payment, which can be in the range of ₹40,000-80,000 based on the car model you opt for.

So, keep saving to accumulate the surplus. But even more important is the interest rate on a car loan, which at the moment stands at 8.15% p.a.-15.18% p.a for new cars. For older cars, the interest rate applicable ranges from 14%-21% p.a. So, let's explore out the car loan interest rate of different lenders.

Interest Rate Glossary:

• State Bank of India (SBI) offers new and used car loan at  9.20%-9.25% p.a. and 12.65% per annum, respectively.

• HDFC Bank provides a new car loan at an interest rate of 8.15%-15.18%, while the used cars are available at 14.50%-17.50% per annum

• Kotak Mahindra Bank’s new and used car loans are offered at 11.5%-13.5% and 17%-20% per annum, respectively

• ICICI Bank provides new car loan at 10.75%-12.75% per annum and used car loan at 14.50-16.25% per annum

• The interest rate applicable on a new and used car loan of Axis Bank stands at 11%-12% and 14.50%-16.25% per annum.

• The new car loan at Bank of Baroda starts from 8.85% per annum.

• Bank of India offers both new and used car loans at 9.30% per annum.

How Do Lenders Determine Car Loan Interest Rates:

Lenders generally offer a car loan on either fixed or floating rate. In the former option, the interest rate remains the same throughout the tenure of a loan. With the same rate, the monthly EMI will remain the same.

Fixed rate of interest is given on daily, monthly or annual reducing balance. In daily reducing balance, the principal gets reduced each day. Since it does not seem practical, most lenders have discontinued the daily reducing balance mechanism. In the case of a monthly reducing balance, the principal on a car loan is reduced with the payment of EMI each month. The interest is computed on the remaining balance.

The interest rate on a car loan is offered primarily on a monthly reducing balance. While with the annual reducing balance, the calculation of interest is made on the balance remaining at the end of a year. Obviously, it causes a dent in the pocket of a borrower who has to pay the interest on a previous year balance despite the reduction of principal.

Floating rate car loans imply that the rate of interest will keep on changing with the change in Marginal Cost of Lending Rate (MCLR), a mechanism introduced by the RBI to ensure transparency in the bank's lending rates with respect to the rate changes made by the central bank. Lending rate of a floating rate car loan equals to 1-year MCLR plus the spread.

What Does MCLR Include:

MCLR includes the costs that are borne by the commercial banks. All such costs are explained below for you to see.

Operating Expenses- The costs incurred for the day-to-day operation of a bank is termed as operating expenses.

Cost to Maintain Cash Reserve Ratio (CRR)- Are you aware of the term CRR?  To your knowledge, it the cost that banks incur in the wake of keeping the cash reserves with the RBI, which in return does not offer any interest on such deposits. Since banks do not earn any interest on the reserves, they invariably transfer the cost to the borrowers.

Marginal Cost of Funds- This cost includes the interest paid by the banks to the depositors opening a savings, current, fixed deposit as well as other accounts. The cost is also influenced by the repo rate, which means the rate at which the banks borrow a short-term loan from the RBI.

Tenor Premium- An additional portion of interest over the base rate based on a loan tenure.

Car Loan EMI Calculator:

You would love to know the impact that interest rate can have on your monthly EMIs, don't you. For that, you need to glance at a car loan EMI calculator, which shows the EMI and overall interest repayments over the years. Plus, a year-on-year schedule of principal and interest repayments would also be shown. In addition, you can get to know the balance outstanding each year. Suppose you want to avail a car loan of ₹ 6,00,000 for 5 years at SBI whose existing interest rates range from 9.20%-9.25% p.a. In that case, the EMI, interest and overall repayments are 12,513-12,528, 1,50,800-1,51,676 and 7,50,800-7,51,676

Basic Details of Car Loan:

• Loans available on passenger cars, Sports Utility Vehicles (SUVs) and Multi Utility Vehicles (MUVs)
• Maximum loan Tenure-7 years for new cars, 5 years for old cars

• Both salaried and self-employed can apply for a car loan