The evolving financial markets have made it simple to avail loans and advances for meeting diverse funding needs with ease. Meeting big-ticket lifestyle spending needs is also simplified with the availability of these financing options. The likes of two wheeler loans have further helped upkeep these requirements, allowing one to defer the cost of this big-ticket purchase, and pay for it later with much greater affordability. However, the overall affordability of the loan primarily depends on the two wheeler loan interest rate applicable on the selected offer. It is thus best to be well aware of the applicable rates, fees, and charges that come with the loan before finalising your offer.
Several other aspects need to be considered as well related to the loan’s interest rate as the levy systems can vary from one loan option to another, impacting the overall affordability. Let’s check out the various aspects related to the loan interest levy for a better understanding and computation of the loan affordability.
Two Wheeler Loan Interest Rate
The two wheeler loan interest rate is levied as per varying base rate systems and levy systems, which one must know before borrowing. Elucidated under are the primary ones.
– Types of rate levy system
Two wheeler loans attract two primary levy systems which can be the key differentiators to how much you end up paying as interest accrued on the advance. They include fixed and floating rate levy systems.
Under the fixed rate system, as its name suggests, the loan is disbursed at a certain rate, which continues to be the rate levied on the loan throughout the tenure for the purpose of repayment liability calculation. One great thing about the fixed rate levy is that it is not impacted by the fluctuations in rate changes as per the market trends. The disadvantage is, however, that the fixed rate of two wheeler loan levy, or any loan for that matter, is set a notch higher than the floating rates, which makes it a tad costly to bear.
Contrarily, a floating rate is an interest rate levy system that keeps changing from time to time throughout the loan tenure based on the market trends. Particularly, it gets impacted by repo rate changes, monetary policy changes and such other crucial factors that govern the two wheeler loan interest rate market. Floating rates can be more affordable than fixed rates as the overall rate remains a notch lower than the latter. However, they inherently carry the risk of market rate changes for the bike loan borrower as well. Under the floating rates system, lender provide financing either based on MCLR or RLLR base rate system.
– Types of base rate system
Two wheeler loan interest rates are levied under two base rate systems typically. Base rate is the minimum rate that marks the threshold for determining the final interest rate levy based on the added spread, which is a margin lenders add over and above the base rate to cover their costs. The base rate is set as per the Monetary Policy applicable to the given financial year. The primary base rate systems that are applicable to the current financial market include MCLR and RLLR.
MCLR or Marginal Cost based Lending Rate system is a lending rate determination system that allows lenders to select a levy as per the applicable base rate. The base rate determination under MCLR is often internally determined, which leaves transparency under the wraps, causing the blockage of Monetary Policy benefits transference to the general public.
Keeping this in mind, the policy committee decided to do away with this system and replace it with a better, transparent one. Accordingly, the MCLR-based lending system has been decided to be phased out as repayments of the loans so disbursed completes.
Replacing it, the RLLR-based levy system has been introduced which is much more transparent, and allows the benefits to be passed on to the borrowers. RLLR or Repo Linked Lending Rate uses the RBI-introduced repo rate as the base rate for the sake of setting the final two wheeler loan interest rate levy. Based on this rate, the lender adds a spread of their own to arrive at the ultimate lending rate levied on the bike loan.
Along with these policy related factors, there are several borrower-based aspects that can result in varying interest rate and charges levy for a two wheeler loan. Let’s check out some of them for a better understanding of the cost of your loan.
Borrower Related Factors That Impact Interest Rates
Below given are some crucial factors that can impact your two wheeler loan interest rate levy.
1. Credit score of the individual
The credit score of an individual defines his or her creditworthiness for the advance, which lenders check even for secured advances like a bike loan. A high credit score means low risk of defaults or delays in loan recovery, which indicates low interest rate levy when availing a two wheeler loan.
2. Down payment made
For availing two wheeler loans, individuals need to pay a certain amount upfront as down payment, which is actually a percentage of the bike’s total cost. The remaining amount is financed by the lender in the form of a loan. It is ideal to make a higher down payment than asked for to maintain a positive financial standing, thus getting the chance to avail low rates on the advance.
3. Loan amount and tenure selected
A high loan value availed for a long tenure can be another reason for high rate levy. It is thus best to choose the financing value and the repayment period optimally. Use an EMI calculator to better decide on the affordability. Applicants can also submit documents related to all of their monthly income sources to better represent their repayment capacity. Further, it is always wise to apply for a loan amount lower than your maximum eligibility to better secure an affordable two wheeler loan interest rate. Take the help of an eligibility calculator to better determine your maximum loan availability and apply for the advance accordingly.
