Along with comparing interest rates, the EMI amount and repayment term offered by different lenders should also be taken into consideration.
There are different types of auto loans available in the market today. However, while opting for a loan, borrowers generally prefer variable rates considering the lower interest rates.
Sumit Chhazed, co-founder of OTO Capital, says, “In addition to comparing interest rates, the EMI amount and repayment term 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 has to take into account his permanent financial constraints, otherwise it will become a financial burden for the borrower in the long term.
However, what factors affect loan interest rates generally remain unanswered. Here are some of the factors that influence auto loan interest rates:
- CIBIL Score – A score between 750 and 900 by any company providing credit information is considered excellent and between 300 and 549 is considered poor. Based on the score, borrowers will be able to negotiate the interest rate with their banker as it denotes their creditworthiness.
- Loan Amount – Chhazed says, “The loan amount can indeed impact the interest rate because the higher the loan amount, the higher the risk and the higher the interest rate. Lower the loan amount, lower the interest rate. Note that this situation is applicable holding all other factors constant.
- Term – The term you choose as a borrower plays a central role in determining the interest rate, as it can fluctuate depending on the period chosen. For example, a one-year term may make your EMI payment high, but will give you a lower interest rate. On the other hand, Chhazed says that a 2-year term is the most balanced term because the EMI and interest rate would be optimal, and for a 3-year term, even if the amount of EMI is lower, the interest rate will be high.
- Source of income – If you are a salaried employee, you can easily avail a loan and get it approved. Experts say that the amount one receives for the salary will reveal the amount he should pay as an EMI. Chhazed explains: “The debt to income ratio is taken into account here. The higher the ratio, the higher the risk for the financial institution and they can ask the borrower to pay a higher interest rate to mitigate the risk and vice versa.
- Down payment – If you make 50-70% of the cost of a vehicle as a down payment, experts say this can relatively lower your EMI and interest rate because the associated risk is lower for the financial institution.
- Residence – Where you live can influence the interest rate on your loan. Chhazed says, “If a borrower lives in a metropolitan area, their income should be higher than in a two-tier or three-tier area. Thus, the standard of living of the borrower plays an important role in determining the rate.
- Eligibility Criteria: Loan eligibility criteria may differ from lender to lender. Some of the common conditions include;
- Age – The age group is taken into consideration, in which the borrower should generally belong to the category of 21 to 60 years old.
- Employment Status – Whether you are a permanent, temporary, or self-employed worker affects your loan application. “Lenders always prefer to give loans to people who have regular income or with job stability,” adds Chhazed.
- Income – The minimum monthly income must be between Rs 10,000 and 20,000 but this may vary from lender to lender.
- CIBIL Score – You must have a CIBIL of 600 and above. This score represents your credit history and your ability to repay the loan.
“In short, in addition to the factors and eligibility criteria mentioned above, some lenders may offer the option of choosing a variable interest rate and a fixed interest rate. But sometimes coming to a decision can be difficult,” adds Chhazed.
He further adds, “It should be remembered that the fixed interest rate is always higher than the variable rate, but it remains the same or constant, regardless of market rates.”
For example, if your car loan interest rate is 20%, it will stay the same. Whereas if you opt for a variable rate, it will increase or decrease over time depending on market conditions.