Impact of RBI Repo Rate Cuts On Car Loans

The 50 basis points repo rate cut by the Reserve Bank of India (RBI) has brought in cheers among borrowers and automobile industry alike. The rate cut will boost automobile and two-wheeler sales in the coming festive season. As about 65% of the new car sales are financed by car loans, rate cuts will lead to an increase in sales volume. Let us see how the repo rate cuts will benefit you as a prospective car buyer or an existing borrower.

Reduced EMIs for new car loan borrowers

In response to RBI’s rate cuts, several banks including State Bank of India, Bank of India, ICICI Bank, and Andhra Bank have already cut their base rates and other banks are expected to follow suit soon. These base rate cuts will make your new car loan cheaper too. If you are thinking of purchasing a new car, this is the right time to go for your dream car as you can avail the offers and discounts for the coming festive season at lower interest rates.

For example, if you are planning to avail a car loan of Rs 10 lakhs for 4-year loan tenure, a 40 bps reduction in your car loan interest would lead to a savings of Rs 9,264 during the entire loan tenure. The savings in the case of 30 bps rate reduction would be Rs 6,960. The table below shows your reduced EMI and savings in case of 30, 40 and 50 bps reduction in car loan interest rates, respectively.

As a new borrower, you can benefit from the combined impact of savings made from reduced car loan interest rates and offers and discounts available during the festive season.

Marginal impact of repo rate cuts on existing car loans

The rate cuts would not help bulk of the existing borrowers as most of the car loans in India have fixed interest rates. Almost all the major private sector banks, such as ICICI Bank, HDFC Bank and Axis Bank, offer car loans on fixed interest rates. However, Andhra Bank, Punjab National Bank and State Bank of India are some of the few banks who provide automobile loans on floating rate of interest.

Are there any benefits in transferring the loan to a lender?

Existing car loan borrowers on fixed interest rates can think of car refinance. Car refinance is the official transfer of ownership from one lender to another. With car refinance, you can transfer your car loan to a new lender and opt to lower your interest rate and/or increase your tenure. However, the tenure of car loans being shorter than that of home loans, your savings will not be as substantial as on a home loan refinance. Moreover, you will have to take into consideration the prepayment penalties charged by your existing lender and the documentation hassles associated with the transfer of your car loan. If your savings after the adjustment of prepayment charges are not substantial, you should continue with your existing lender.