Purchasing a new two-wheeler can be tedious and confusing. There are numerous factors you need to consider before even thinking about applying for a two-wheeler loan. For starters, you need to select the type of bike you wish to purchase. Then you need to choose the brand and the model, and finally, ensure that the two-wheeler fits within your budgetary limits. The silver lining, however, is that you can seamlessly apply for a two-wheeler loan and purchase your dream bike without disrupting your savings.
The caveat remains that two-wheeler loans attract interest charges, and these differ from one lender to the other. Typically, interest rates range from 6.85 percent to 28.3 percent per annum, and depending on various factors such as your credit profile and relationship with the lender, these rates can be generous or burdensome. It is important that you compare the interest rates offered by different lenders in the market, and choose a bank or NBFC that offers nominal interest rates.
Before you start collating information, it is important that you understand how interest is calculated, and the different components involved in this equation.
Calculating the Amount You Pay as Interest
To know how much interest can be charged on your bike loan, you need to consider three elements. Once you are aware of these three facets, you can use a bike loan EMI calculator
to calculate the EMI amount, as well as the total amount you pay as interest during the loan period.
Principal Amount: Principal amount refers to the amount you borrow from the lender to finance the purchase of your two-wheeler. Banks and NBFCs offer 70 - 100 percent of the on-road price of the bike, and the amount you accept as a loan needs to be repaid as per the loan agreement.
Interest Rate: On top of the principal amount, lenders levy interest, which can range from 6.85 - 28.3 percent per annum. It is crucial that you opt for a loan with the lowest interest rate, as these rates determine the amount you pay as EMI each month. The higher the interest rate, the higher the EMI amount.
Tenure: As per the loan agreement, you will have to pay EMIs for a specified time period until the total loan amount is repaid. Tenures can range from 12 months to 60 months, and the higher the EMI amount, the smaller the tenure. Alternatively, you can opt to pay smaller EMIs and choose a longer repayment period.
Once you know the principal amount, interest rate and tenure, you can calculate the simple interest by multiplying the three variables. The resultant amount is the total interest you pay on your bike loan, which is in addition to the principal amount you borrow.
Fixed and Floating Interest Rates
When talking about the two wheeler loan interest rate
, you need to be aware of the two types of interest rates that are normally charged. While availing of a loan, you will have the option to either choose a fixed interest rate, or a floating interest rate. It is of paramount importance that you know about these terms, as these can either reduce the total amount you pay, or substantially increase your loan amount and consequently, your EMI amount.
Fixed Interest Rate: When you choose a fixed interest rate, the interest rate remains the same throughout the loan tenure, and you will have to pay the same EMI amount every month. Fixed interest rates thus remain the same, regardless of the market fluctuations.
Floating Interest Rate:
If you opt for a floating interest rate, the rate of interest changes when the base rate changes. It is important to note that floating interest rates
are cheaper than fixed interest rates, as fixed interest rates are typically 1-2.5 percent more than floating interest rates. Because of the changes in the interest rates, the EMI amounts keep changing, and floating interest rates are ideal for short-term loans.
Factors Influencing Interest Rates
Lenders levy interest rates primarily based on the borrower’s credit profile, income level and repayment capacity.
Credit Profile: If you’ve never defaulted and have a clean credit history, you will be considered a reliable borrower. Lenders tend to look favourably at such borrowers, and do not charge a ‘risk premium’ over and above the base interest rate.
Income Level: Your financial status has a significant bearing on the interest charged by banks and NBFCs. If you have a steady income source and prove to the lender that you are a responsible borrower, a nominal interest rate would be charged on the loan amount.
Repayment Capacity: Salaried individuals with stable jobs are usually charged lower interest rates on their two-wheeler loans. On the other hand, self-employed individuals are offered two-wheeler loans on relatively higher interest rates.
Thus, before applying for a bike loan, you should ensure that you have a good credit score, and compare interest rates offered by different lenders. Certain lenders such as Bajaj Finserv offer two-wheeler loans at nominal interest rates. It is also recommended that you self-finance your new bike as much as possible, and apply for a bike loan to cover the remaining cost.