The car loan market in India is becoming quite competitive as banks offer lower rates of interest with the growing demand for passenger vehicles. The latest data provided by Paisabazaar shows that there are a handful of public sector banks currently providing the cheapest car loans rates in the country, with the minimum rate as low as 7.35%, while some have not been able to reduce the rate, depending on the borrower's profile, which is as high as 14%.

Key Highlights

• PSU banks offer cheapest car loans starting at 7.35%, lowering monthly EMIs for borrowers significantly.
• EMI difference between cheapest and costliest car loans now approaches Rs 1 lakh over five years.

The increasing gap between the two has now driven up the total cost of financing a customer's loan and purchasing the same vehicle. With a loan amount of Rs 5 lakh and a loan term of 5 years, the difference between the cheapest and the most expensive car loans could be as much as Rs 1,650 per Equated Monthly Installment (EMI) or almost Rs 1 lakh for the entire loan period.

The borrowers can avail of the monthly EMIs as low as Rs 10,000 at the lower end of the spectrum. But if the interest rate is higher, you have to pay more than Rs 11,600 every month for the same loan amount and tenure.

Car Loan Rates

At present the best starting rate is offered by UCO Bank, which comes out to be 7.35% with an estimated EMI of approximately Rs 9,983 for a loan amount of Rs 5 lakh for a five-year car loan period. Other public sector banks like Canara Bank, Bank of Maharashtra and Union Bank of India are also providing a competitive rate ranging from 7.45% to 7.50%, which make monthly repayments around the Rs 10,000 mark.

The other hand is that of Punjab & Sind Bank, which has rates of loans for cars ranging from the upper end of the spectrum which is 14% and the monthly EMI is around Rs 11,634. Also, the lenders like Bank of India and Indian Overseas Bank have a much wider interest-rate range, which can end up costing borrowers more than Rs 11,000, especially if they are deemed to be a higher risk.

Those who have a poorer credit history, income patterns or low eligibility may actually be paying significantly more for the same vehicle purchase as those with better financial characteristics, industry experts note.

The latest data also points to the aggressive competetive pricing strategy adopted by the public sector banks in order to compete with the big private banks in the vehicle financing market. Private banks keep leading the way in auto loans in terms of tie-ups with dealers, faster loan approvals and digital onboarding services, whereas PSU banks are becoming more attractive in terms of the pure interest cost.

For instance, the car loan rates start at 8.15% in case of HDFC Bank and it begins at 8.35% in case with ICICI Bank. The IDFC FIRST Bank offers a starting rate of 8.99% and consequently the EMIs would be higher than some PSU banks.

Also Read: NBFCs Gain Consumer Loan Share Over Private Banks; RBI Curbs NBFC Norm

In addition to interest rates, processing charges are also becoming a significant factor affecting the actual cost of car loans. Currently, the processing fee is not levied by any lender (like Indian Overseas Bank) but some banks charge up to 2% of the loan amount. With a loan amount of Rs 5 lakh, borrowers might be expected to pay a total of up to Rs 10,000 before they receive the vehicle.

Another trend in retail banking pricing that is gaining in popularity is relationship-based pricing. For instance, Bank of Maharashtra is offering concessional interest rates to existing home loan customers and long-term account holders, whereas Punjab & Sind Bank is offering Waiver of selective processing fee under special schemes.

With the current lending climate, it is more important than ever to compare lenders. The difference of just one percent in car loan rates could be worth tens of thousands of rupees over the five-year loan period.

Two customers buying the same car will end up paying vastly different interest rates on their loans, as banks are now beginning to charge in line with the creditworthiness, payment history, income security and banking history of the individual.