Recently, ICICI bank has introduced a floating rate car loan. With this ICICI has become the first among the private banks and Non-banking finance companies (NBFCs) to offer this to retail loan customers. Until now, the floating rate option was only available for long-term housing loans. The bank has linked the floating rate to Floating Reference rate (FRR), the benchmark rate used by bank to price its floating rate loans to retail customers. However, the question arises- Is a short tenure (3-5 years) floating rate car loan a feasible option?
Consider the differential between the two rates
Let us consider ICICI's floating rate car loan offer. Currently the floating rate available to customers is 50 basis points (half a percentage point) lower than its equivalent fixed rate product. . That means that if you can get a fixed rate car loan at 13 percent, you can avail floating rate car loan at 12.5 percent. If you opt for fixed rate car loan, the interest that you pay would be same for the entire tenure of the loan whether the interest rate increases to 15 percent or drops down to 11 percent. On the other hand, if you go for a floating rate car loan your outgo will reduce if the interest rates go down and it will increase if the interest rate increases.
In such a situation, you should choose the type of car loan depending upon your stance on future interest rate movement that is if you expect the interest rate to rise, you should go for a fixed rate car loan. If you think that the interest rates would go down in future, opt for a floating rate car loan. In case you do not want to make any conjectures and not take any risk, go for the fixed rate car loan.