Should you opt for a fixed-rate or a floating-rate loan?
30 Jan 2008
You may have heard of floating-rate home loans, but floating-rate car loans? That seems strange. They are quite a new phenomena and not all banks offer them right now. But should you opt for one? Let's examine the matter in detail.
A fixed-rate loan, by definition, is one where your EMI is fixed irrespective of prevailing interest rates. For a floating-rate loan, on the other hand, your EMI may increase or decrease depending on the interest rate scenario. If only life were so simple!
In the absence of historical data for floating-rate car loans, we will examine this using the template of home loans. As per historical records, from 2004 to 2007, when interest rates were rising, banks were quick to increase their home loan interest rates, and consequently, their customers' EMIs. However, this same swiftness of action was missing when rates declined from 2001 to 2003. The rates that customers were charged, and the EMIs they were required to pay, largely remained the same for the major part of the period.
Taking this into account, and the fact that floating-rate loans are not much discounted from fixed-rate ones, it is advisable to opt for a short-duration fixed-rate loan for one's car.
