There are various types of vehicle loans available in the market today. However, while opting for a loan, borrowers usually prefer variable rates in view of lower interest rates.
Sumit Chhazed, Co-founder, OTO Capital, says, “Along with comparing interest rates, the EMI amount and repayment tenure offered by different lenders should also be taken into consideration by a borrower.”
He further adds, “It is always important to opt for an EMI plan that is best suited to one’s needs. One should take into account one’s ongoing financial constraints, or else, it would become a financial burden for the borrower in the long run.”
However, what factors affect the loan interest rates usually remain unanswered. Here are some of the factors that influence vehicle loan interest rates:
- CIBIL score – A score between 750-900 by any credit information providing company is considered excellent and 300-549 is deemed to be poor. On the basis of the score, borrowers will be able to negotiate the interest rate with their banker as it denotes their creditworthiness.
- Loan amount – Chhazed says, “Loan amount can indeed impact the interest rate as the higher the loan amount, the more the risk involved, and the interest rate is high. Lower the loan amount, lower the rate of interest.” Note that this situation is applicable keeping all the other factors constant.
- Tenure – The tenure you choose as a borrower plays a pivotal role in deciding the interest rate as it can fluctuate depending upon the period chosen. For instance, 1-year tenure can make your EMI payment high but will give you a lower interest rate. On the other hand, Chhazed says a 2-year tenure is the most balanced tenure as both EMI and interest rate would be optimal, and for 3-year tenure, even though the EMI amount is less, the interest rate will be high.
- Income source – If you are a salaried employee, you can easily avail of a loan and get it approved. Experts say the amount one receives towards salary will reveal the amount he/she should pay as EMI. Chhazed explains, “The debt-income ratio is taken into account here. The higher the ratio, the higher the risk for the financial institution and they may ask the borrower to pay a higher rate of interest to alleviate the risk and vice versa.”
- Down payment – If you make 50-70 per cent of a vehicle cost as downpayment, experts say that can relatively reduce your EMI and interest rate, as the risk associated is lower for the financial institution.
- Residence – The place you reside can influence your loan interest rate. Chhazed says, “If a borrower lives in a metropolitan area, his/her earnings should be higher than a two-tier or three-tier area. Thus, the borrower’s standard of living plays a significant role in deciding the rate.”
- Eligibility criteria: The loan eligibility criteria may differ from lender to lender. Some of the common conditions include;
- Age – The age group is taken into consideration, wherein usually the borrower should fall into the category of 21-60.
- Employment status – If you are a permanent, temporary, or self-employed person, affects your loan application. “Lenders always prefer to give loans to people who have a regular income or with job stability,” adds Chhazed.
- Income – The minimum monthly income has to be between Rs 10000 – 20000, but this may change from lender to lender.
- CIBIL score – You must have a CIBIL of 600 and above. This score represents your credit history and efficiency to repay back the loan.
“Long story short, apart from the above-mentioned factors and eligibility criteria, some lenders may give the option of choosing a variable rate of interest and a fixed rate of interest. But sometimes, arriving at a decision may be difficult,” adds Chhazed.
He further adds, “One should remember, the fixed rate of interest is always higher than the variable, yet it remains the same or constant irrespective of the market rates.”
For instance, If your vehicle loan interest rate is 20 per cent, then it would remain the same. Whereas if you opt for a variable rate, it would increase or decrease with time in accordance with market conditions.