Will car loans become costly after repo rate hike? Here's what you should know

For people planning to buy a car or those already repaying a floating-rate auto loan, the key question is:

Will the RBI's rate hike make car loans more expensive?

The answer is potentially yes, but not for every borrower and not necessarily immediately.

Which car loans can become more expensive?

Borrowers with floating-rate or repo-linked car loans are the most exposed to an increase in the RBI repo rate.

When a bank revises its applicable benchmark following a repo-rate change, the interest rate on loans linked to that benchmark can also rise. Depending on the lender's terms, the higher interest rate can result in a higher EMI, a longer repayment tenure, or both.

However, a 25-basis-point increase in the RBI repo rate does not automatically mean that every car-loan rate will rise by 25 bps.

Fixed-rate car loans are generally not affected by an immediate change in the RBI's policy rate during the fixed-rate period.

How much could your car-loan EMI increase?

To understand the possible impact, consider a ₹10 lakh car loan for five years.

PNB currently publishes a new-car floating rate of 7.65% for borrowers with a CIBIL score of 750 and above.

At 7.65%, the EMI on a ₹10 lakh, five-year loan is approximately ₹20,137.

If the entire 25-bps increase is passed on to the borrower, the rate would become 7.90%. The EMI would then rise to approximately ₹20,254, an increase of around ₹117 per month.

The same calculation can be applied to other banks based on their currently published car-loan rates.

What does this mean for borrowers?

If the entire 25-bps RBI rate hike is passed on, a borrower with a ₹10 lakh, five-year car loan could see the monthly EMI increase by roughly ₹117-₹126 in the examples above.

The actual impact will depend on the bank's benchmark, spread, reset mechanism, outstanding loan amount and remaining tenure.

What about Canara Bank and Bank of Baroda?

Canara Bank currently publishes a 7.90% interest rate for four-wheeler loans for the CRG-Prime category, for sanctioned loans of up to ₹15 lakh. Assuming a full 25-bps increase, the illustrative rate would become 8.15%.

Bank of Baroda currently publishes a floating new-car rate starting at 7.60%. Assuming a full 25-bps increase, the illustrative rate would become 7.85%.

What about ICICI Bank and HDFC Bank?

ICICI Bank's current new-car loan rate starts at 9.15% for a 36–84-month tenure, subject to the borrower's profile and the vehicle.

HDFC Bank currently advertises new-car loan rates starting at 8.15%

Will every car-loan EMI rise immediately?

No. The RBI's repo-rate decision is not the same as an immediate 25-bps increase in every car loan.

The impact depends on:

• Whether the loan is fixed or floating

• The benchmark to which the loan is linked

• The bank's spread over the benchmark

• The loan's reset frequency

• The outstanding principal

• The remaining tenure

For an existing borrower, the bank may increase the EMI, extend the repayment tenure or use a combination of the two, depending on the loan terms.

What should car buyers and existing borrowers do?

If you are planning to buy a car, compare the effective interest rate. Also check the loan tenure, processing charges, prepayment conditions and the benchmark used for floating-rate loans.

Existing borrowers should check their loan agreement to determine whether their loan is fixed or floating and when the interest rate is reset.

For a borrower taking a larger loan, even a small increase in the interest rate can add to the total repayment cost.

The RBI's shift to ‘Calibrated Tightening’ also means borrowers should keep in mind the possibility of further changes in interest rates depending on the inflation and growth outlook.