Car loan rates are slated to go up further with Reserve Bank of India (RBI) announcing an increase in cash reserve ratio (CRR) by 50 basis points and in Repo rate (the rate at which RBI borrows from banks) by 25 basis points on March 30, taking them to new levels of 6.5 and 7.75 per cent respectively. Interest rates hikes over the past two years have made car loans costlier by almost 3 percentage points, racing ahead from 9 per cent in 2005 to around 12 per cent today (add another 3-5 percentage points for second hand car loans).And is beginning to hurt. “This has had an adverse impact on the car market,” says N R Narayanan, head (vehicle loans), ICICI Bank. “Interest rate rises have seen a slow down in the growth rate of car sales and a more prominent trend of people moving away from the financing route to buying car on cash.”Rising interest rates have led people to realise that contrary to the situation two years back where the lending rates were very low now, it does not make any sense to go in for a loan on a depreciating asset, says Veer Sardesai, a Pune based financial planner.“Car loans have become expensive today and it does not make sense to take a loan on a depreciating asset any more. Instead, you can pay outright from yoursavings for the car you purchase and go for as less loan as possible.”Adds Narayanan: “Earlier, almost 80 per cent of the cars sold were through the financing route. Over the past three months this has got reduced to 75 per cent. This is because people are now preferring to purchase a car on cash rather than going for a car loan at high interest rates.” Unlike home loans where households have a floating rate option, car loans are generally fixed and hence the loan on a car will not see a revision on tenure or EMI. Though banks have a Force Majeure clause — it allows them to revise fixed rate loans as well — this has not been done so far, says Narayanan. “A rise of 200 to 300 basis points does not lead us to a situation where we have to invoke this clause. Only when interest rates reach unrealistic levels will we be bound to invoke it. And this seems unlikely for now.”India’s largest bank and a big player in the car loans segment, State Bank of India (SBI), has most of its loans on floating rates so the lenders of the bank would have been impacted by the ongoing rise in interest rates even on their previous car loan says, Sangeet Shukla, chief general manager, personal banking.“We are not raising the tenure on car loans and since the car loan is of short tenure the interest rate impact is not much. The hike in EMI currently amounts to Rs 50-60 per lakh of loan.”Buying in cash and investing the rest makes sense . Read today’s Express Money
