A fixed interest rate is one that remains the same throughout the tenure of your bike loan. A floating interest rate is one that changes periodically based on market conditions. Both have their own advantages and disadvantages, depending on your financial situation and preferences. Let's take a look at the features, benefits, and drawbacks of fixed and floating interest rates for bike loans, and help you decide which one is better for you.
What is fixed interest rate?
A fixed interest rate on a bike loan is one that remains constant throughout the loan tenure. It offers stability and certainty, as you know exactly how much EMI you have to pay every month, regardless of the market fluctuations. However, the interest rate could be comparatively higher, as it includes a premium for the risk that the lender takes by locking the rate for a long period.
What is floating interest rate?
A floating interest rate is one that can change during the loan tenure, depending on market conditions. It offers flexibility and savings, as you can benefit from the favourable interest rates when the market conditions are conducive, and reduce your overall loan cost. The interest rate is comparatively lower, as it reflects the current market scenario and the risk that the borrower takes by opting for a variable rate.
For example, suppose you take a bike loan of ₹1 lakh for 3 years at a fixed interest rate of 12%p.a. Your EMI will be ₹3,321 and your total interest payable will be ₹19,562. On the other hand, if you take the same loan at a floating interest rate of 10% p.a. your EMI will be ₹3,226 and your total interest payable will be ₹16,130. However, if the floating interest rate increases to 14%p.a. your EMI will be ₹3,419 and your total interest payable will be ₹23,079.
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What are the factors affecting the bike loan rate?
Credit Score
Your creditworthiness, as reflected in your credit score or credit history, holds paramount importance. A strong credit score can unlock a more favourable interest rate, establishing you as a trustworthy borrower renowned for your consistent and timely payments.
Initial Payment
This represents the amount you contribute upfront from your personal funds to acquire the motorcycle, independent of the loan amount. A more substantial initial payment empowers you to enjoy a reduced interest rate.
Income Source
A stable and dependable source of income is a key factor. Financial institutions are inclined to offer you a lower interest rate when you demonstrate reliability in making payments, driven by the confidence in your consistent earnings.
Age Factor
Age is a critical determinant of your motorcycle loan's interest rate. For instance, older customers may encounter higher interest rates due to their shorter loan repayment window. In contrast, younger individuals with a steady income stream can benefit from more attractive interest rates.
Loan Duration
This signifies the period over which you will be repaying your loan. While an extended loan tenure translates to higher total interest payments, it typically comes with a lower interest rate. The choice of loan duration plays a pivotal role in shaping your motorcycle loan interest rate.
Geographical Influence
Although motorcycle loan interest rates in India are thoughtfully structured to be affordable, the specific city in which you reside exerts a significant influence on your interest rate. Metropolises with higher living costs are often associated with elevated motorcycle loan interest rates.
Difference between fixed interest rate and floating interest rate
| Aspect | Fixed Interest Bike Loan | Floating Interest Bike Loan |
|---|---|---|
| Beneficial for | Individuals with a steady income, preferring budget stability. | Those with variable incomes and a tolerance for rate fluctuations. |
| Protection from | Potential future interest rate hikes. | Benefit from future interest rate decreases. |
| Initial EMI (Typically around 12% p.a. approximately) | ₹3,321 (Approx. 11% of income) | ₹3,226 (Approx. 10.75% of income) |
| Drawback | Potential to be costlier; does not benefit from rate drops. | Unpredictable and volatile; risk of higher EMIs with rate hikes. |
| Illustration - Fixed Rate | Total interest payable: ₹19,562. | Unable to benefit if rate drops (e.g., to 8% p.a.). |
| Illustration - Floating Rate | Total interest payable: ₹16,130. | Higher total interest (e.g., ₹26,678 at 16% p.a.). |
Benefits of fixed and floating interest rates
- A fixed interest rate is beneficial for those who have a fixed income and prefer to plan their budget in advance. It also protects them from any rise in interest rates in the future.
- A floating interest rate is beneficial for those who have a variable income and can afford to pay higher EMIs when the interest rates increase. It also allows them to take advantage of any fall in interest rates in the future.
Drawbacks of fixed and floating interest rates
- A fixed interest rate has a drawback of being potentially costlier than a floating interest rate, as it does not change with the market conditions. It also does not allow the borrower to benefit from any drop in interest rates in the future.
- A floating interest rate has a drawback of being unpredictable and volatile, as it changes with the market conditions. It also increases the risk of paying higher EMIs when the interest rates rise in the future.
Which one is better for your bike loan?
There is no definitive answer to this question, as it depends on various factors such as your income, risk appetite, loan amount, loan tenure, and personal preference. However, here are some general guidelines to help you make an informed decision:
| Choose Fixed Interest Rate | Choose Floating Interest Rate |
| If you want to have a fixed EMI throughout your loan tenure and avoid any uncertainty or risk. | If you want to save money on your loan cost and are willing to take some risk and uncertainty. |
| If you have a short-term loan (up to 3 years), as it will not make much difference in your loan cost. | If you have a long-term loan (more than 3 years), as it will give you more chances to benefit from potentially lower interest rates in the future. |
Pro tip: Before choosing a fixed or floating interest rate for your bike loan, you should check the reset clause of the lender. The reset clause is the frequency at which the floating interest rate is revised based on the market conditions. The reset clause can vary from monthly, quarterly, half-yearly, or yearly. A shorter reset clause means that your floating interest rate will change more frequently and reflect the current market scenario more accurately. A longer reset clause means that your floating interest rate will change less frequently and lag behind the current market scenario. | |
You should also consider the following factors before choosing a fixed or floating interest rate:
- The current market scenario and the expected trend of interest rates in the future. You can check the repo rate and the base rate of different banks and financial institutions to get an idea of the prevailing and projected interest rates.
- The difference between the fixed and floating interest rates offered by the lender. You can compare the effective interest rates (EIR) of different bike loan offers to find out the actual cost of borrowing. The EIR is calculated by taking into account the interest rate, processing fee, prepayment penalty, and other charges associated with the loan.
- The prepayment and foreclosure options and charges of the lender. You should check if the lender allows you to prepay or foreclose your bike loan partially or fully before the end of the tenure, and what are the charges involved. This can help you save money on your loan cost if you have surplus funds or want to switch to another lender.
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Fixed Vs Floating: Think stability
A bike loan is a great way to finance your dream bike without putting a strain on your finances. However, choosing between a fixed and a floating interest rate can be tricky, as both have their pros and cons. You should consider your financial situation, goals, and preferences before making a choice. You should also compare the bike loan offers from different lenders and check their terms and conditions carefully. Several loan providers offer online facilities allowing you to apply online or visit any of their physical branches to get your bike loan approved quickly and easily.
