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Fixed Vs. Variable Interest Rate - Which Is Good For Bike Loan?

The type of interest rate you choose can significantly impact your monthly payments and overall loan cost. This article will explore the pros and cons of fixed and variable interest rates and help you decide the best fit for your bike loan.

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Fixed Vs. Variable Interest Rate For Bike Loan
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It is great that you are turning your dream of owning the bike you have been eyeing into reality. While you apply for the loan to finance the purchase, you might want to give attention to the terms and conditions of the loan that might mention either of the two - fixed interest rate or variable interest rates on the bike loan. The type of interest rate you choose can significantly impact your monthly payments and overall loan cost. This article will explore the pros and cons of fixed and variable interest rates and help you decide the best fit for your bike loan. 

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What is a fixed interest rate?

Fixed interest rate is when the rate remains constant throughout the loan term, irrespective of market rates. Subsequently, your monthly payments also remain the same, making it easier to budget and plan your finances.

For example, if you avail a bike loan with a fixed interest rate of 7%, the same rate will be applicable even if market interest rates rise or fall during the loan term. 

One advantage of a fixed interest rate is that it provides stability and predictability, which can help you avoid any unexpected increases in your monthly payments due to fluctuations in market interest rates. It can also help you plan for other expenses since you know how much you need to set aside for your loan payments.

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However, the downside of a fixed interest rate is that you may pay more interest over the loan term if market interest rates fall below your fixed rate. It is because you will continue to pay the same interest rate throughout the loan tenure. Moreover, banks or NBFCs usually charge a slightly higher fixed interest rate as compared to their offering on variable interest rate-based loans at that point in time.

What is a variable interest rate?

A variable interest rate on a bike loan means the interest rate fluctuates over time, based on certain factors such as market conditions, inflation, and the lender's policies. It is also known as the floating interest rate. Since the interest rate keeps changing, calculating the total cost of the loan becomes a challenge.

If the interest rate increases, your monthly payments will also increase, and you may pay more interest over the life of the loan. Conversely, your monthly payments will decrease if the interest rate decreases, making the loan cheaper. However, in most cases, the floating rate is lower than the fixed rate charged by the lenders when you apply for the loan.

Factors that affect the bike loan interest rate

The following factors can impact your bike loan interest rate:

  • Credit score: Your credit score is one of the most significant factors influencing the bike loan interest rate. Lenders consider a high credit score as a sign of responsible borrowing behaviour and are open to negotiations on the interest rate with such borrowers. Conversely, a low credit score indicates a higher risk of default and the lender may push for a higher interest rate. Thus, you must maintain your credit score to get favourable loan terms. A score of 750+ is considered appealing. 
  • Age: The bike loan interest rate tends to be higher if you are nearing retirement, since your repayment capacity will be lower. 
  • Nature of employment: Salaried employees are considered more reliable and gather higher trust value than self-employed individuals or those working on a commission basis. This is due to the visible stability of income. Hence, salaried employees may be offered lower interest rates than self-employed borrowers. However, if you are self-employed, you may show your financial records and proof of regular income to get similar benefits. 
  • Place of work: If you work in a reputable, well-established company, you may be offered a lower interest rate than someone working in a less stable or risky industry. This is because it shows more job security, making it less risky for the lender to offer you the funds. 
  • Income level: The borrower's income level is another important factor that lenders consider when determining the bike loan interest rate. Higher-income levels are generally associated with a lower risk of default; hence, such borrowers may be offered lower interest rates.
  • Debt-to-income ratio: The debt-to-income ratio measures a borrower's loan repayment ability. It is the ratio of the borrower's total debt to their income. A high debt-to-income ratio indicates a higher risk of default and may result in a higher interest rate.
  • Relationship with the lender: The borrower's relationship with the lender can also affect the interest rate on a bike loan. Borrowers with a good relationship with the lender, such as those who have previously borrowed and repaid their loans on time, may be offered a lower interest rate as a sign of appreciation for their loyalty and trustworthiness.

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Tips to lower your bike loan interest rate

Here are some tips to help you lower your bike loan interest rate:

  • Go for a short tenure: When you take out a loan, interest is charged for the entire tenure of the loan. The longer the tenure, the higher the interest liability. If you can afford it, opt for a shorter tenure. While the monthly payments will be higher, it will reduce your interest burden and help you repay the bike loan faster, saving money in the long run.
  • Clear your debts: If you have other debts, such as credit cards or personal loans, it's a good idea to clear them before applying for a bike loan. It will improve your credit score and increase your chances of getting a lower interest rate. Lenders are more likely to offer lower interest rates to borrowers with good credit scores and a low debt-to-income ratio.
  • Negotiate with the lender: Don't be afraid to negotiate with the lender for a lower interest rate. If you have a good credit score and a stable income, you can convince the lender to offer you a lower rate. Also, if you have a pre-approved loan offer from another lender, you can use it as leverage to negotiate a better rate.
  • Take out a loan from an existing lender: If you have an existing relationship with a lender, such as a bank where you have a savings account or a credit card, you may get a lower interest rate on a bike loan. Lenders often offer preferential rates to their existing customers, so it's worth checking with your bank or credit card issuer before applying for a bike loan elsewhere.

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Fixed vs variable: Which interest rate is right for your bike loan?

Both fixed and variable interest rates have their pros and cons. One way of assessing the more suitable option is the level of risk associated with each.

A fixed interest rate is what it sounds like – a rate that remains the same throughout the life of your loan. It frees you from the worries of unfavourable changes in the market and the economy. It can provide peace of mind and certainty, as you know what you will pay monthly. However, fixed rates are generally higher than variable rates. 

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On the other hand, a variable interest rate can fluctuate up or down over time, depending on various factors such as the Reserve Bank's official cash rate, inflation, and lender policies. While it can mean that your repayments may go up or down, depending on the market, it can also offer the potential for savings if interest rates drop. 

Eventually, it comes down to your preferences and risk tolerance. A fixed interest rate may be your best option if you value stability and predictability in your budgeting. However, a variable rate could be worth considering if you're willing to take a risk for savings. Based on your preference, compare the interest rate and apply with the banks that offer you the lowest bike loan interest rate.

Some lenders might offer a hybrid option combining fixed and variable rate elements. For example, you can choose a fixed rate for a certain period (such as the first few years of your loan) before switching to a variable rate for the remainder of the term. Make sure you ask your lender about all available options before making a decision.

In Conclusion

Choosing between a fixed or variable interest rate for your bike loan depends on your financial situation and risk tolerance. A fixed interest rate may be the best choice if you prioritise stability and predictability in your monthly payments. However, you may miss out on potential savings if the interest rates go down during your loan tenure. Fixed interest rates are also generally higher than the variable interest rate offered to you when you initially sign up for the loan. It's important to carefully weigh the pros and cons of each option and consult with a financial expert to determine which type of interest rate best fits your specific needs and goals.

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