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Top 7 Factors that affect the Interest Rates on Car Loans

Financial aids from banks and financial institutions always come with an unseen price and not at free of cost. This is commonly called as the interest rate or the loan rate. The interest rates differ from bank to bank and depend on the type of loan or loan amount.

In the recent times we have seen the CRR (Cash Reserve Ratio) and the Repo rates being slashed. This has brought wind of relief for potential car buyers who have been postponing their plan to buy car for a long time. There are several factors that affect the interest rate on loans. We have briefed some of them here to ease and simplify the loan lending procedure.

Prime Lending Rate (PLR)

PLR is the rate of interest based on which the banks lend money to their credit-worthy customers. This rate is considered as the standard rate for most of the loans. Though this rate is not set by the RBI but broadly they denote the interest rates in the economy.

Apart from the bank’s policy, RBI’s policy, liquidity in the market along with the demand for credit by consumers (both retail and industrial) decides the PLR. Additionally, the PLR rates are influenced by both the repo rate and cash reserve ratio rates. PLR is necessary to pull out the excessive money in the economy. PLR are utilized by the government to control inflation by increasing or decreasing its rates. This directly impacts the interest rate on loans offered by different banks putting extra burden on car buyers.

Cash Reserve Ratio (CRR)

CRR primarily used to regulate the lending capacity of banks which further controls the money supply in the economy. CRR is entirely controlled by the RBI. When there is enormous money supply causing an upward pressure on inflation, the RBI increase the CRR which causes the short of deposits with banks that in turn elevate the interest rates on loans.

Recently due to credit crunch in the market RBI has made CRR cuts to bring liquidity into the financial system. This was expected to impact the interest rates on loans.

Despite the cut in the CRR, the Indian car industry is still experiencing credit crisis and as result many car financiers in the country have either hiked the interest rates by 100 basis points (1%) or are planning to do so very soon.

Repo rate

In case of credit crisis, the banks take the financial support from the RBI and this is where the Repo rate falls in. It is rate fixed by the RBI for the banks. A reduction in the repo rate will be beneficial for the banks to get the money at a cheaper rate. And the loans become expensive whenever the repo rate increases.

Reverse Repo Rate

Reverse repo rate is the rate at which the banks deposit their money to the RBI. So when Reverse Repo Rate increases, the cost of borrowing funds of the banks rise this is then passed to the public as higher interest rates on loans.

SLR (Statutory Liquidity Ratio) Rate

Before offering credit to the customers it is necessary for the banks to maintain a repository of funds. It can be in any form like cash, gold, government bonds, etc. This step is taken so that RBI will have a hold over the bank's credit expansion. These rates will further enhance the liquidity in the financial system resulting in increase or decrease in PLR, therefore influencing the car loan Interest rates.

Benchmark Prime Lending Rate (BPLR)

Some time ago, those who had been subjected to steep interest hikes eagerly looked forward to see the interest rate cuts from their banks. Some banks were planning to pass on the benefits to the existing customers while others were cutting down interest rates only for their new customers. Finally, the interest rate was fixed with certain low or high percentage depending upon the BPLR. The percentage is decided by the banks focussing on the factors like loan eligibility and credit profile of a loan seeker.

The banks are required to make necessary changes in existing car loans. As the banks are given the right to set the percentage for the BPLR, they offer attractive values to their new customers but continue to charge higher interest rate for older customers.

Every bank follows a schedule so that it is beneficial to its customers. According to bank policies, this change or floating interest can come into effect on a quarterly or yearly basis or with immediate effect. Thus the interest rates on loans are largely depends on the BPLR.

Overall, the RBI tunes all the parameters like CRR, repo rate, reverse repo rate, PLR, SLR, and BPLR to check inflation and based on this the banks adjust their lending or investment rates on loans.

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