Fixed and floating interest rates for two-wheeler loans: Know the difference between the two
Article by Drivio | 21st Feb 23
Bracing up to finance your two-wheeler through a loan from a reputed bank or NBFC? Of course, you would try to remain on the affordable end. While exploring low-interest loan options, you might land up in the dilemma between fixed vs floating interest rates for two-wheeler loans. Unless you make an informed decision regarding the rate of interest, you might repent paying higher EMIs.
Motorcycle loans are easily available from a multiplicity of financing organizations. While you might focus solely on festive season offers, flexible repayment tenure, or interest rate comparison, it’s easy to miss out the type of interest rates. Broadly speaking, financing institutions calculate the rate of interest in two ways: fixed and floating, Let’s understand the two-wheeler loan interest rate types in this article.
What are fixed interest rates for two-wheeler loans?
When you obtain a two-wheeler loan with fixed rate interest, this rate remains constant throughout the period of loan repayment. Even if the repo rates of RBI change or the standard market rate fluctuates, you would be paying the same rate of interest until you completely pay off the debt. Therefore, your EMIs would remain the same even if the interest rate varies in the market. In a nutshell, you lock the interest rate when you go for fixed rate loans for buying motorcycles.
Some creditors offer two-wheeler loans at a fixed interest rate only for the initial few years. Later, they might want you to switch to a variable or floating rate of interest.
Benefits of fixed interest rate loans for two-wheelers
- Once you lock the interest rate, you continue to pay low EMIs even if the market rates rise. For instance, if the RBI hikes the repo rate, most banks and NBFCs would increase motorcycle loan interest rates. However, if you settle with a fixed rate interest loan, you won’t be paying a higher EMI.
- Given that the interest rates don’t change throughout the loan tenure, you know how much EMI you need to pay. This goes a long way in assisting your financial planning and budgeting. Accordingly, you can schedule your investments and savings with transparency.
Situations where fixed interest rate loans are suitable
- While monitoring the two-wheeler loan interest rate trends in the financial market, you might notice a downward trend. Under these conditions, it would be wise to lock your interest rate while it is low. This way, you would continue to pay lower EMIs even when the market rates soar after a few months.
- If you are financially resilient and want to get a concrete idea on your monthly EMI payments, it’s wise to get a fixed rate interest loan for two-wheelers. This will enable you to schedule all your EMIs beforehand.
- At times, you may predict interest rates in the financial markets to rise, based on various prime parameters. In these cases, it would be a wise decision to lock your rate while it remains low.
What are floating interest rates for two-wheeler loans?
Unlike fixed interest rate loans for two-wheelers, loans with a floating interest rate involve changing EMIs depending on the fluctuations in the financial market. Banks and NBFCs calculate the interest on a base rate, which also has a floating element. So, if the RBI hikes the repo rate, your lender will transfer this to you in the form of higher loan interest rates. Eventually, you would be paying higher EMIs.
Again, if the standard lending rates in the market drop due to favourable conditions, you would be the gainer. So, if you are open to risks and want to capitalize on supportive market conditions, it pays to go for a floating interest rate to purchase your two-wheeler.
Benefits of floating interest rate loans for two-wheelers
- Compared to fixed rate interest loans, you would be paying anything between 1% to 2.5% lower with a floating interest rate with the same lender.
- Usually, fixed interest rate loans turn out to be more expensive to borrowers.
- Even if the floating rate exceeds the fixed rate of interest, the fluctuation would be temporary. You might be paying lower than the fixed rate interest throughout the tenure of your loan.
Situations where fixed interest rate loans are suitable
- In case the current interest rates are high and you settle for a floating rate loan, you would be paying lower EMIs when the lender slashes the interest rate.
- You might have some indication that the two-wheeler interest rate would decrease in the short run. In such situations, it pays to settle with a floating internet rate loan.
- If you are someone who doesn’t have much insight into the fluctuations of the interest rate. So, you may want to stick to the standard rates offered by banks. In these cases, too, it would be a logical decision to go for a floating rate loan.
Can you switch between fixed and floating interest rates?
Now that you know the strategic benefits of the two-wheeler loan interest rate types, you would want to know whether it’s possible to switch between these two interest rate mechanisms. Thankfully, most lenders allow borrowers to switch from fixed interest rate loans to floating, and vice versa.
However, you need to pay a processing fee while making this switch. This can be up to 2% of the total loan amount, or your creditor might specify a certain amount that you need to shell out.
Before switching between these two types of interest rates, it’s wise to carry out an interest rate comparison. In the process, you can calculate the savings after factoring in the processing charges.
We have comprehensively discussed the fixed vs floating interest rates for two-wheeler loans for your understanding in this article. If you are planning to purchase your new two-wheeler, make sure to explore the trending interest rates in the market.
By evaluating the historical rates, you should be able to judge whether the ongoing rates are high, low, or somewhere in the middle. Accordingly, you can decide whether to go for a fixed internet rate loan or a variable one for purchasing your two-wheeler.