Auto loans: Floating rate is in

Most car buyers, when applying for a loan, grapple with the question of whether they should opt for a fixed or a floating rate option.

This question assumes importance as car loans have a lower tenure than home loans. Typically, home loans have a 15-20 year tenures, during which the borrower will go through a few rate cycles. If the interest rates rise in the interim, their equated monthly instalments are likely to shoot up.

For instance, home loan floating rates are over 11.5 per cent for most banks currently. However, three to four years ago, they were as low as 7 per cent. In other words, over a long time the overall impact on the finances would, more or less be balanced.

Car loans, on an average, are for three to four years (maximum tenure: 7 years). That means that a person mostly would find it difficult to gauge that whether they are entering a rising or a falling cycle.

In the past one year, many public sector banks, including State Bank of India, Bank of India and Bank of Baroda have started offering floating rates on auto loans. Private sector lenders too are beginning to offer floating rate loans. ICICI Bank, which was offering both floating and fixed options way back in September 2007, is planning to offer only floating rate loans from August 25.

Said N R Narayan, head of vehicle loans, ICICI Bank, "Earlier, we were planning to increase over fixed and floating rates by 50 basis points each. However, now we feel that the interest rate cycle has almost peaked. For the customer, it will make a lot of sense to get into floating rate auto loans." Expecting another rate hike in the coming six months, he said the interest rates would move southwards after that.

Agreed Govind Pathak, director, Acorn Wealth, a financial planning firm. "Six months ago, the answer would have been definitely fixed because of the uncertainty in the interest rate scenario. Now, floating rate looks like a better option," he said. Of course, for the borrower who is taking the loan for the short-term like six months or one year, fixed is still the best option. For a three-year plus tenure, floating should be the choice.

However, though this is the immediate solution as far as the choosing the interest rate goes, auto buyers in the future will have to carefully gauge the scenario before taking a call on the right option.

Banks like Punjab National Bank, Allahabad Bank, Oriental Bank of Commerce offer only fixed rates.