If you are looking to purchase a bike with the help of a loan, surely a lot of things are on your mind. One of your biggest worries is the interest you would be required to pay. While opting for a bike loan, choosing between a fixed or a floating interest rate is a crucial decision.
This choice can have a major impact on your monthly EMIs and the aggregate cost of your bike loan. Hence, it is important that you get a better understanding of the difference between the two, along with the pros and cons of each.
Difference between Fixed and Variable Bike Loan Interest Rates
Here are some pointers to help you understand both concepts and differentiate between them.
| Pointers | Fixed Interest Rate | Variable Interest Rate |
| Concept | Lending rate remains fixed throughout the loan tenure | Lending rate is subject to regular revisions each quarter |
| Prepayment Charges | The borrower can be asked to pay a prepayment fee | The borrower cannot be asked to pay a prepayment fee as per RBI guidelines |
| Rates | Interest rates are usually 1% to 2% higher than floating interest rates | Interest rates are usually 1% to 2% lower than fixed interest rates |
| Risk-Appetite | Typically chosen by individuals with a lower appetite for risk and those who prefer stability | Typically chosen by individuals with a higher risk appetite and those knowledgeable of market trends |
When Is It Ideal To Opt For A Fixed Interest Rate?
Now that we have understood the difference between the two bike loan interest rates, let us look at situations where you should opt for a fixed interest rate.
1. Stability
If you are someone who enjoys security and stability in your life, a fixed interest rate might be the perfect option for you. This ensures that you pay a fixed amount as EMIs each month. Despite changes in market interest rates, i.e., the MCLR, there is no change in your monthly instalments under fixed interest rates.
2. Security
As mentioned above, a change in market interest rates has no effect on loans taken with fixed interest rates. This helps manage risk better and ensures that the interest rate remains constant over the entire tenure. If you are someone with a low-risk appetite, a fixed interest rate might be a better option for you. It can be extremely beneficial in case of successive lending rate hikes by the RBI during macroeconomic uncertainties and tensions.
3. Planning & Budgeting
If you like to be prepared and in control of your finances at all times, a fixed interest rate can be really beneficial for you. When you opt for this option, you get the chance to plan better as the monthly instalment is predetermined and fixed. As it is not subject to any change, you can calculate your monthly budget accurately in advance. You can do so easily with the help of convenient tools like a bike loan EMI calculator.
When Is It Ideal To Opt For A Floating Interest Rate?
Now that we have had a deeper understanding of fixed interest rates, let us also look at scenarios where a floating interest rate can be beneficial.
1. Lower Rates
Typically, a floating interest rate is lower by 1% to 2%, compared to a fixed rate. This is because the fixed rate is inflation adjusted and remains constant for the entire tenure. On the other hand, the variable rates change as per changes in RBI’s MCLR and are revised on a quarterly basis. Hence, if there is a decrease, your EMI amount is likely to reduce as well. This option works well for risk takers, who understand market trends and can plan their finances accordingly.
2. No Prepayment Charges
If you are looking to close your loan before the tenure is over, you can do so without paying any additional charges. As per RBI regulations, if you prepay or foreclose your bike loan, taken on a floating interest rate, you are not required to pay a fee. This allows you to save more money on the total cost of your loan.
3. Repayment Flexibility
With fluctuations in the floating interest rate, the amount you are liable to pay changes almost continuously. Some lenders may give you the option to choose between extending/decreasing your tenure or increasing/lowering your EMIs as per rate change. This allows you to adjust your repayment, enabling you to make the most of these rate revisions.
Things To Consider When Choosing Between Fixed & Variable Interest Rates
If you are looking to get a bike loan on a fixed interest rate, ensure that you compare multiple offers. Also, keep in mind that if you make prepayments and close your loan sooner than the determined tenure, you will have to pay an additional penalty. This can increase the total cost of your loan and might even cost you more than paying it would when paying as per the fixed schedule. This usually happens when prepayments are made in the later part of the loan tenure.
Meanwhile, if you are looking to get a bike loan on variable interest rates, conduct a proper market study. Check the trends in rate change and its forecast over the course of your selected tenure. The constant change in your bike loan interest rate makes it difficult to gauge the exact expense. Hence, planning and budgeting can become a challenge, as even tools like the bike loan EMI calculator might be of little help.
No matter what your choice, a fixed or variable interest rate plan, make sure to compare the various bike loan interest rate offers available. Try and calculate your total cost and plan your finances around it to avoid defaulting. Now that the concepts are clear, go on, make the choice to get a bike loan that suits you best and enjoy the ride!
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