SBI brings teaser rates to car loan market

At a time when the banking sector is mulling over a sensible rate hike on all loans, State Bank of India ( SBI) has extended the 8% offer on its car loans up to June 30.

The SBI Ezee Car Loan Scheme offers car loans at 8% per annum for the first year and 10% for the second and third years. The EMI (equated monthly instalment) on a car loan will be as low as Rs 1,559 in the first year and Rs 1,647 in the second and third years for every Rs 1 lakh.

The interest rate will be reset from the fourth year at the card rate (rack rates which doesn’t include dealer discounts or other subventions) contracted on the date of sanction, depending on the tenure of the loan.

At present, the floating rates of car loans offered by other banks hover around 9.5-14% depending upon the tenure of the loan. The fixed rates are in the range of 10.5-15%.

The maximum loan amount for a used car is Rs 15 lakh. There is no such limit for a new car. However, in the Ezee Car Loan Scheme, there is a cap on the loan amount at 2.5 times of the net annual income. You can enhance the loan amount by clubbing the spouse’s income with yours. You have to make a minimum downpayment of 15% of the on-the-road price of the vehicle and interest is calculated on the daily outstanding balance.

The interest cost to a borrower is lower than that compared with monthly outstanding balance or a flat rate charged. The processing fee is 0.5% of loan amount.

The repayment plan is as high as 84 months (7 years) for salaried individuals. For the self-employed, the maximum repayment term is 60 months (5 years). However, the bank offers another variant in car loans called ‘Advantage Loan’ which offers 7-year repayment period to self-employed individuals as well.

The Ezee loan scheme is the best bet for borrowers who plan to pay off the loan in 3-5 years. The bank offers loans for 3 years under this scheme. However, if you plan to avail of a longer tenure loan, the bank may slap a penalty of 2% of the repaid amount subject to certain conditions. Hence you should evaluate your repayment capacity and stick to the schedule.

However, starting July 1 banks will peg interest rates on various loans disbursed by them to their ‘base rate’ instead of the benchmark prime lending rate (BPLR), which, by and large, has been serving as the yardstick.

All banks are still grappling with the new barometer for pricing their loans. This could impact the loan offer from the fourth year amid uncertainty on what the banks would fix as the benchmark rate, below which they would not be able to lend, unlike under the current dispensation.
Why go for it: With interest rates likely to rise in the coming months, locking into low rates during the initial years makes sense, particularly if you are looking to pay off the loan in first 3-5 years.

Why not: Clarity on base rates will emerge only in July, which means that the rates on car loan contracts from the fourth year will be signed under this cloud of uncertainty.