Why are car loan rates volatile?
One thing I have wondered about is why car loan rates in India are so volatile? When I purchased my car in October 2005, I got a 3-year loan at a fixed interest rate of 8% p.a. But only a few months later, I saw that rates has jumped up to ~11%. This certainly wasn’t the case for home loans, which went up only 0.5% (if at all) during the same period.
Today, the Economic Times reports that “car loans will see an interest rate hike for the fourth time in a row in as many months, by 0.75 - 1%.” This takes loan rates to the 13-14% range, a fairly large increase compared to what I paid over a year ago. I don’t have statistics on what % of people finance their cars versus buy them outright - but I doubt this is good news for car manufacturers.
Thoughts?
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March 7th, 2007 at 3:45 pm
cars depreciate faster than homes. so recovery in cases of default are lower. the interest rates reflect this increased risk. assume 2 loans car loan C and house loan H- at rs 100 each. C’ underlying honda city depreciates at 20% and house at 10%(in cases where there is no catastrophic crash), after 2 yrs C underlying is worth 64 rs and the home is worth 81 rs. in order for the bank to avoid it’s foreclosure norms it has to rceover it’s car loans faster. the prepayment risk of car loans is also greater because car is lower in the priority order for a house. also i think(no proof) that car loans are poorly diversified across time, space and people compared to house loans.
March 7th, 2007 at 5:01 pm
I see your point - but I think that mostly explains why car rates should be HIGHER than home loan rates at any given point. I’m not sure if the reasons you gave fully explain why the rates vary so much.
March 8th, 2007 at 4:32 pm
car loans almost always tend to floating rate-based in contrast to the home loan market which is indexed to fixed rates. thus if loans riseo or fall banks have to move faster to reset the rates. that’s why teh variation.