The Reserve Bank of India (RBI) increased the repo rates—the rate at which it lends to banks—by 40 basis points. One basis point is one-hundredth of a percentage. The repo rate is now 4.40 per cent. In the wake of this development, lenders are expected to increase interest rates. Therefore, would this be a good time to lock into fixed rate loans like personal, car and consumer durable loans?
A major part of retail loans that are available on ‘fixed rate’ come in the form of car loans and personal loans. Not every lender offers such loans at a fixed rate, but a number of them do.
While most public sector banks offer personal loans on floating interest rates, a number of private sector banks and non-bank finance companies (NBFCs) offer these on fixed interest rates.
Most PSU banks offer car loans at floating interest rates, whereas, some banks like State Bank of India (SBI), some private sector banks and NBFCs usually offer car loans at fixed interest rates.
So, when is it beneficial to take a fixed rate loan? Now is a good time, say some. “At least over the period of the next two years, we see interest rates increasing both globally and in India as a result of the global rate hikes. In light of this, it would be worthwhile to opt for ‘fixed rate loans’ like personal loans, car loans and consumer durable loans where the tenor of the loan is less than two years,” says Vivek Iyer, partner and national leader, financial services, Grant Thornton Bharat, an integrated assurance, tax, and advisory firm.
When the overall interest rates are rising, it makes sense to take a fixed interest rate car or personal loan with a long tenor, i.e., 5 to 7 years. You could save a significant amount of interest outgo.
Before Taking A Loan
Most personal loans operate on a fixed-rate model though several floating rate loans are also available. With interest rates set to rise, a fixed rate loan can be less expensive in the long run.
That said, there are two things a borrower should keep in mind. “First, several lenders have already hiked their lending rates between yesterday and today. So, you may not necessarily get the pre-hike rates. Second, not all loans may be fixed for the entire tenor. So, read the loan documents carefully to understand the exact implications of opting for the fixed (rate) loan,” says Adhil Shetty, CEO, BankBazaar.com.
It is always a good idea to do a proper calculation to understand the implications of opting for a fixed versus a floating loan. You can use online calculators for this purpose and figure out how much you would stand to gain or lose in each case.
“Keep in mind that the loan rates are expected to rise by 1-2 per cent in the next 13-18 months. Factor this in when you calculate your outflow,” explains Shetty.
Apart from the interest rate, look at other factors such as required loan amount and tenor and prepayment clauses before taking a decision.