A two-wheeler loan is a great help when you are looking for your desired bike, but your funds are not enough. Especially when your choice is a high-end model, exhausting your entire savings is not a smart idea. Competitive interest rates, easy accessibility, and repayment flexibility have made bike loans popular financing options in India. However, remember that it is still a credit facility, and you must make informed decisions to secure your funds. One of the most important factors you must consider is the bike loan interest rate. After all, it largely determines your borrowing cost and affects the EMI amount to pay each month.
Understanding the factors affecting the interest rate will help you look for the most favorable option with affordable rates. Alongside, you can also use a two-wheeler loan calculator to plan it well. Read on to learn what they are.
Creditworthiness
Your credit score is one of the primary factors affecting the interest rate. After all, this 3-digit number represents your credibility based on your past credit behavior, credit utilization, repayment history, diversity in the credit portfolio, outstanding balances, DTI ratio, etc. A higher credit rating means a lower risk for the lender, which is why you can obtain the lowest possible interest rate offer with a high credit score. On the other hand, a lower credit rating means a higher lending risk for the loan provider, attracting a higher interest rate for compensation.
Building and maintaining a good credit rating is necessary to secure the most favourable interest rate. Paying all EMIs and credit card bills on time, reducing the credit utilisation ratio, paying loan repayments consistently, and avoiding several loan applications are simple ways to maintain a good credit score within a short duration.
Income and Employment
Lending institutions evaluate your income and employment stability to assess your repayment capacity. Lenders perceive you as a reliable borrower if you have a stable job with a high income at a reputable organisation. Thus, your chances of getting the lowest bike loan interest rate are higher. On the other hand, if your company delays salary payments or you change jobs frequently, loan providers may charge a higher interest rate to compensate for the risk. So, try to get a job at a reputable company and maintain stability to get favourable interest rates on your loans. Self-employed individuals must also have good work years to showcase income consistency.
Show other income sources besides your regular income while applying for a bike loan. These include rental income, part-time or freelance jobs, investment dividends, etc. All these can increase your revenue and help you get a bike loan at a lower interest rate.
Loan Amount and Tenure
The loan amount is the principal amount you borrow to purchase the bike, and tenure is the duration within which you must repay the borrowed amount with interest. Generally, bigger loan amounts and longer repayment tenures pose a higher risk to lenders, causing them to charge a higher interest rate. Conversely, smaller loan amounts and shorter repayment terms attract lower interest rates due to lower risk for the lender.
Use a two-wheeler loan calculator to decide on an appropriate loan amount and select a repayment tenure with budget-friendly EMIs. Evaluate your funding requirement carefully, choose a bike in your budget, and choose a loan amount and repayment tenure according to your financial goals and monthly budget. Remember, your final choice will largely impact your loan interest rate.
Type of Interest Rate
Bike loans come with two types of interest rates – fixed and floating. While a fixed interest rate remains the same throughout the repayment tenure, a floating rate varies based on market conditions. The interest rate type you choose, or the lender provides can significantly affect your two-wheeler loan interest rate.
Usually, loans with fixed interest rates are costlier than those with floating rates because they provide protection against market fluctuations and keep your EMIs unchanged. Such interest rates allow you to plan your repayment in a better way since you know the EMI amount you must adjust in your monthly budget during the repayment term. On the contrary, a loan with a floating interest rate is cheaper initially, but its EMI may increase during the tenure, according to market fluctuations. So, the type of your loan interest impacts your interest rate significantly.
Loan-to-Value (LTV) Ratio
The LTV ratio is the portion of the bike’s price that the lending institution finances through a two-wheeler loan. It is an important factor affecting your bike loan interest rate. A higher LTV ratio means you take a bigger loan amount to finance the bike’s value. It increases the lender’s risk, causing them to charge a higher interest rate. So, determine the loan amount carefully to benefit from a cost-effective interest rate. You can reduce the LTV ratio by saving money for a bigger down payment or opting for a pocket-friendly bike. It helps reduce the overall cost of borrowing by lowering the principal amount requirement.
Economic and Market Conditions
Market trends, monetary policies, and inflation rates can impact your two-wheeler loan interest rate. Under high inflation conditions and economic uncertainties, lending institutions may charge a higher increase rate to mitigate the associated risk. On the contrary, during favorable monetary policies and low inflation rates, they may charge a lower interest rate to stimulate the loan market and support economic growth. So, monitor the prevailing market conditions and borrow at the right time to benefit from the lowest possible interest rate.
While several factors affecting the interest rate are beyond your control, compare the loan plans carefully and improve your eligibility and credibility to boost your chances of getting the most favorable bike loan interest rate. Considering these factors while making a loan application help you make informed decisions and save money over the loan tenure. It also ensures a smooth loan experience by getting approval fast and easily.
Conclusion
Research and compare to get the best possible interest rate on a bike loan, and use a two-wheeler loan calculator to make better choices. Stay mindful of your repayment capabilities and financial situations to buy your dream bike without putting undue strain on your finances.
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