Since RBI raised the policy rates by 50 bps recently, 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 but can also make people postpone their purchases. These two events will shape the interest rate of other banks.

In the case of SBI car loan is currently 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 3rd May, 2011.

Now that RBI has announced its intention to raise the rate by 50 bps, most of the lenders will increase their car loan rates very soon. SBI, however, did waive 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.

Prepayment penalty was an unnecessary burden on borrowers who wanted to pay off their loans early. An increase of 50 bps by RBI was a shocker despite the fact that most of the experts and economists knew that this would be 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. The 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.

Car loan rates have increased and hence it is more important now than ever to do the due diligence on rates and compare different options.

Some of the steps customers can take are the following:

You can 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.