After the RBI raised key rates by 50 bps on May 3, we can expect banks to follow suit and increase the interest rates, but it may not happen immediately. The possible hike in interest rate will impact car loan borrowers heavily. A hike of 50 bps by RBI on top of an already high repo rate is a double whammy for borrowers. Not only does it make the cost of borrowing expensive, it can also make people postpone their purchases. These two events will shape the interest rate of other banks.

New car loan rates

In the case of SBI, the car loan rate is at 2.25% premium over the base rate, effectively making it 10.75%. The maximum payback period has been fixed at seven years. This was before the RBI review meeting on May 3, 2011.

Now that RBI has raised rates by 50 bps, most of the lenders will increase their car loan rates very soon.

SBI, however, has waived off the prepayment penalty. This is a good step as prepayment penalty was one area where banks and borrowers did not see eye to eye. It was an unnecessary burden on borrowers who wanted to pay off their loans early.

Click to Apply for SBI Car Loan

An increase of 50 bps by RBI was a shocker despite the fact that most experts and economists knew that this would be the RBI’s step to tame inflation. These rates are for the period before the policy review meeting took place. Hence, there a definite possibility that the interest rates on car loan could go up further eventually. 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.

Guidelines to buying

Car loan Interest Rates have increased and hence it is more important now than ever to do the due diligence on rates and compare different options. Hence, you should search online to get quotes from various banks, compare, and find the best deal.

A few banks give extra discount if you have taken a home loan from them and have been repaying your EMIs consistently. Lastly, try to make a higher down payment. The interest burden will drastically reduce.