What is the impact of choosing a fixed versus floating interest rate on used car loans?

The decision to take out a used car loan with a fixed or floating interest rate is an important one. In both cases, the impact on your monthly repayments and total cost of borrowing, will be very different. Having an understanding of the differences will help you choose what is right for you based on your current financial situation.

When you enter into a loan with fixed interest rate, you will know what your EMIs will be and this will not change during the loan period. This makes managing your monthly budget straightforward as you will have certainty of what your repayments will be each month. In the general sense, if you want to make a commitment for stability or believe that rates are going to rise, fixed interest rates are usually the best choice for you. Fixed rates tend to be slightly above floater rates to compensate for the certainty of fixed rates, perhaps 1% to 2.5% above floating rates.

On the other hand, floaters are likely to move up and down based on market behaviours as reported by the Reserve Bank of India’s repo rate, or using your lender's benchmarks. Typically lower than fixed rates at the time of borrowing, floaters are usually ideal for borrowers with stable or growing income who can handle fluctuations and may want to potentially save on interest in the long run.

If rates drop then there will be a chance that most EMIs will adjust the rate, providing savings in interest. If rates go up then EMIs will also increase, which can make it difficult for you to manage the overall budget.

When making a decision always think about your income stability, risk tolerance and spending goals.