Analyzing the Impact of Inflation on Two-Wheeler Loan Affordability

Analyzing the Impact of Inflation on Two-Wheeler Loan Affordability

Loans by Team Drivio | 10 Oct 2023

The impact of inflation on two-wheeler loan affordability is adverse, as high inflation makes loans more expensive. To mitigate this challenge, borrowers should make a higher down payment, extend the loan tenure, and try to lock the rate of interest with fixed-rate motorcycle loans.

Two-wheelers continue to be the preferred mode of transportation for millions of Indians. The convenience and cost-effectiveness of traveling by bike make it ideal for navigating cities as well as remote areas. Considering the high prices of motorcycles, it’s natural for most owners to turn to reputed banks and NBFCs to finance these purchases. 

However, have you considered the impact of inflation on two-wheeler loan affordability? Inflation is one of the most overlooked aspects when you think of the affordability of your loan.

In this article, let’s explore inflation's effect on motorcycle loan costs. We have also carried out a comprehensive affordability analysis that will help you understand the process better. This way, you will be informed on how inflation affects the EMIs that you will be paying while clearing the loan.

What is Inflation?

Before exploring inflation's effect on motorcycle loan costs, it’s imperative to understand the concept of inflation. Inflation refers to the rate at which the general prices of goods and services continue to rise. This leads to a decrement in the purchasing power of a currency. In other words, each unit of currency can buy fewer goods and services with the rise in inflation.

Let’s take an instance, considering the inflation rate to be 5%. Suppose, the price of an item was INR 100 in the previous year. If the inflation rate is 5%, you need to shell out INR 105 to purchase the same item this year. However, since your income remains the same, you will find it challenging to afford the same item. 

The Impact Of Inflation On Two-Wheeler Loan Affordability

Inflation can have a multifaceted effect on the affordability of two-wheeler loans. Several key factors come into play when you consider the impact of inflation on two-wheeler loan affordability.

1. Rates of Interest

Inflation has a direct impact on two-wheeler loan affordability as the interest rates increase. With high inflation, central banks tend to increase interest rates to combat rising prices. This translates to more expensive loan repayments. As a borrower, you may find it challenging to afford two-wheeler loans. As a result, many existing borrowers decide to extend their loan tenures and reduce their EMIs.

2. Earnings vs. Expenses

During high inflation, the purchasing power of your money gets eroded. So, you might find that your earnings are not adequate to keep up with the rising cost of living. If you are planning to purchase a new motorcycle, and have been diligently putting aside a fund for the down payment, your plans may be disrupted. 

Even affording the monthly installments will be difficult as you need to manage your living expenses with a limited source of income with the prices of essential items increasing. This significantly affects the affordability of two-wheeler loans.

3. Loan Amount and Tenure

The effect of inflation on the loan tenure and the amount you qualify for is indirect. With inflation rates soaring, lenders will adjust their lending criteria. In most cases, they reduce the loan amount they can comfortably extend to you, besides shortening the loan tenures.

As a result, you need to pay higher monthly installments. This is a crucial aspect of your affordability analysis, as you need to set aside your EMI besides managing hour household expenses.

4. Resale Value

Your motorcycle is an asset, and inflation affects the value of your bike. Besides, it aggravates the depreciation rate of the motorcycle. Potentially, this has a negative bearing on the amount you would be receiving after selling it off. This may affect your ability to repay the full loan if you decide to sell the bike before the end of the loan term.

 Affordability Analysis Considering The Impact Of Inflation On Bike Loans

Now that we have discussed inflation's effect on motorcycle loan costs, here’s an affordability analysis that should help potential buyers understand their challenges.

1. Budgeting

Before applying for a two-wheeler loan, it’s imperative to evaluate your budget thoroughly. Factor in your monthly income, expenses, and the impact of inflation on your purchasing power. A strategic approach is to use online calculators to determine the loan amount and tenure that aligns with your financial condition.

2. Interest Rates

It’s recommended to watch out for the existing rates of interest. Central banks may raise the interest rates in case of high inflation, thereby making the overall loan more expensive. Monitor financial news and try to go for fixed-rate loans to prevent fluctuations in interest rates from making your EMIs expensive.

3. Loan Tenure

While shorter loan tenure can lead to higher monthly installments, you can save on your interest in the long run. It’s wise to balance your monthly budget with your long-term financial goals when you determine the two-wheeler loan tenure.

4. Resale Value

Before purchasing your motorcycle, it’s wise to research the resale value of the model. Some brands and models tend to hold their value longer compared to others. This, you can recoup a larger part of your investment if you decide to sell off your motorcycle.

Wrapping up

Inflation is a harsh reality in every economy that affects the quality of lifestyle in the country. Now that you understand the impact of inflation on two-wheeler loan affordability, you can make a strategic decision while applying for your new bike loan. 

A tactical approach with your affordability analysis will help you budget strategically. Choose a loan tenure that won’t stress you financially and consider making a higher down payment. With careful planning, you can mitigate the challenges posed by inflation on your affordability for a bike loan.