How will the car loan scenario impact you?

The base rate as of now stands at 8.5 per cent for SBI. This is not really surprising for people who have been keenly following the RBI and other banks since the past 1 year.

Also, SBI did not increase its rates in March 2011 when RBI increased the policy rates by 25 bps.

Since RBI raised the policy rates by 50 bps recently, we can expect banks to follow suit and increase the interest rates but it may not happen immediately.

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Not only does it make the cost of borrowing expensive but can also make people postpone their purchases.

These two events will shape the interest rate of other banks.

In the case of SBI, the car loan is currently at 2.25 per cent premium over the base rate, effectively making it 10.75 per cent.

The maximum payback period has been fixed at seven years. This was before the RBI review meeting on 3 May, 2011.

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SBI, however, did waive off the pre-payment penalty. This is a good step as prepayment penalty was one area where banks and borrowers did not see eye to eye.

Prepayment penalty was an unnecessary burden on borrowers who wanted to pay off their loans early.

An increase of 50 bps by RBI was a shocker despite the fact that most of the experts and economists knew that this would be RBI's step to tame inflation.

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Bank of Baroda offers 12 per cent for below 15 lakhs, 12.5 per cent for above 15 lakhs.

Maximum of 7 years with 0.5 per cent rate discount if borrowers deposit liquid securities as collateral.

Further 0.25 per cent if the home loan borrowers have good record of repayment.

SBI Car loan scheme offers 10.75 per cent.

Maximum of 7 years with no prepayment penalty, 85 per cent finance and overdraft facility by paying 0.5 per cent extra interest rate.

HDFC car loan scheme offers on case basis maximim of 7 years, with up to 100 per cent finance, up to 3 times of the salary (for salaried professionals) and 6 times the annual income (for self employed professionals).

ICICI Car loan scheme offers on case basis maximum of 5 years, with up to 90 per cent of car value, with fixed rate option only, approved within 24 hours and prepayment fee of 5 per cent.

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Hence there a definite possibility that the interest rates on car loan could go up further eventually.

The banks are probably waiting and watching to see how the lending arena shapes up before rushing to increase their rates.

As such the rates are on the higher side and there is also the fear that any further increase could work against the banks in terms of driving away potential customers.

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Some of the steps customers can take are the following:

i) You can search online to get quotes from various banks, compare, and find the best deal.

ii) A few banks give extra discount if you have taken a home loan from them and have been repaying your EMIs consistently. Use this feature.

iii) Lastly, try to make a higher down payment. The interest burden will drastically reduce.