Purchasing your dream bike is no small feat. It takes a lot of research and planning. The most important factor that influences your buying decision is your finances. Ensuring you have sufficient funds to afford the bike of your choice is vital. An easy way to finance such big-ticket purchases is to get a loan.
But, how do you make sure that the terms of the bike loan are favourable? For this, it is essential to understand the various factors that play a major role in determining your interest rates. These include tenure, and other particulars of the loan, which have an impact on the EMIs you could pay over the next few years. Here are some pointers to keep in mind that could affect your monthly instalments:
1. LTV Ratio
When getting a bike loan, the Loan-to-Value (LTV) ratio offered plays a huge role in determining your EMI. LTV determines the maximum amount a lender is willing to offer you based on the collateral’s market value. In the case of a bike loan, the two-wheeler you look to purchase is considered collateral, on which the LTV is computed. Let us understand this better with an example.
Suppose, you wish to purchase a bike worth ₹2 Lakhs and are looking for a loan. A lender may offer you a 75% LTV, which means you can borrow up to 75% of the bike’s value, that is ₹1,50,000. The higher your LTV the more interest you might be charged on your loan. This can have a significant impact on your monthly EMIs.
2. Amount Borrowed
While you are offered a high LTV, you can choose to borrow a portion of it. The amount you decide to borrow has a significant impact on the calculation of your monthly instalments. It is better to borrow only what you need to, making sure that you don’t have to repay a larger amount. The more the principal amount of your bike loan, the higher your monthly instalment will be.
For example, let us assume that you got a bike loan at an interest rate of 12% for a tenure of 4 years. If the amount you borrowed is ₹1 Lakh, then your EMI is likely to be ₹2,633. However, if you borrowed ₹2 Lakhs, your monthly instalments can be as high as ₹5,267.
3. Loan Tenure
If your loan is for a shorter term, the lender is likely to offer you a slightly lower interest rate. This is because the shorter tenure ensures quicker repayment and hence, reduces the risk of the borrower defaulting. Similarly, if the tenure is longer, the interest rate is likely to be higher as well.
Your credit score and report are a clear indicator of your creditworthiness. Your repayment capabilities are assessed by the lender by checking your credit history, available with credit bureaus. Hence, it is crucial to maintain a good credit score.
Avoid defaulting on your EMIs and credit card bills to ensure that your score is always in the green. Furthermore, if your score is presently at the lower end, make sure to build it before applying for a bike loan
5. Secured or Unsecured Loan
You can choose to get a secured or an unsecured loan. While both are great options in their own right, the cost that comes with these differ. When you apply for an unsecured credit like a personal loan, the interest charged might be higher than that of a secured loan.
This is because, under the secured category, your assets are held as collaterals. These provide some sort of security to the lender in case of non-repayment. This is not the case for unsecured loans. Hence, it is likely that your lender will charge more interest if you opt for an unsecured loan plan, increasing the amount of your monthly instalments.
6. Employment and Income
A stable earning is one of the prerequisites for getting a good deal when applying for a loan. Your substantial income assures the lender of your repayment capabilities, allowing them to lower your bike loan interest rate. Similarly, your employment history and tenure at your current workplace is also verified. These factors can affect the interest rates offered, impacting your EMIs.
7. Fixed and Floating Interest Rates
It is important to have a clear financial plan and select the right bike loan interest rate
that aligns with your repayment strategy. When applying for a loan, your choice of interest type plays a huge role in determining your monthly instalments.
If you are someone who values stability and would like to pre-plan your finances, you might be more inclined towards applying for a fixed interest type. On the other hand, if you prefer riding the waves of market fluctuations, floating interest rates will appeal to you. These rates are initially set a bit lower than fixed rates and change as per the revisions in the lender’s Marginal Cost of Funds based Lending Rate (MCLR).
MCLR is the minimum interest rate determined by a bank after taking into account multiple factors. These include the cost of funds, operating costs, and profit margin. These fluctuate as per changes in inflation levels, world economics and several other factors.
If you look to save up considerably on your monthly instalments, researching and comparing your loan offers is a great starting point. Use an EMI calculator, and insert details like your bike loan’s interest rate and tenure to get an approximate calculation of your instalments.
Sometimes, dealerships have tie-ups with various lenders to help you get a bike loan at favourable terms. You can make the most of such facilities and borrow the required money.
Now that you have understood the key pointers, it’s time for you to make an optimum financial plan, borrow the required amount, and go purchase your dream bike today!