Shifting to lower gear

PERSONAL FINANCE: Car loan rates are on the ascent, and if you still haven't bought that car, you're running out of time. If you're planning to buy a new car on a bank loan, you're already a little late. Be prepared to pay an interest rate at least three percentage points higher than what you would have paid had you bought the car just a few months ago, in December. The effective interest rate on car loans, net of subventions, has moved up to 9-10 per cent from 6-7 per cent last year.

In fact, the rates being quoted for loans at banks nowadays range from 9.5 to 14 per cent though the effective rate is lower as many automobile dealers pass on a part of the commission they receive from banks to car buyers.

Still, rates are on an incline. The effective rate for loans from ICICI Bank has increased to 9.5-10 per cent from about 7 per cent last year. This bank is the leader, in control of over 40 per cent of the car loans market.

HDFC Bank accounts for over 20 per cent of the market, and State Bank of India (SBI), about 10 per cent. It's big money, by the way. In 2005-06, banks and non-banking finance companies lent a total of over Rs 43,000 crore for the purchase of cars.

In case of SBI, the effective rate is at least 1.5 percentage points lower than the quoted rate, as dealers tend to provide discounts which range from Rs 5,000 to Rs 7,000.

That said, according to Soundara Kumar, general manager with SBI, the bank raised its car loan rate by 50 basis points twice during January-March 2006, taking its lending rate band to 9.5-10.25 per cent (depending on the tenure and the city where the loan originates).

Is the increase in rates dissuading car loan seekers? Not in any significant way, report bankers, who expect the upward pressure on rates to continue, given the yawning gap between deposit and credit growth in the banking system.

Senior bank officials say that the interest rates prevailing now "still are quite attractive from a car buyer's point of view. The rise in rates has not really had any negative impact."

Says a private bank official, not wanting to be quoted: "The rates will continue to rise further. The recent spate of increase in deposit rates, on top of the hikes in January-March 2006, will add to the already enhanced cost of funds. To protect net interest margins, banks will certainly look at again raising auto loan rates as they did with home loans."

Competition, however, may go up too ""with the foreign banks that left the market earlier when rates fell to around 7 per cent planning a possible re-entry now.

But their lure is the rise in rates. So if there's a car you still haven't bought, do it fast. You may still get a good deal, especially if you wrangle part of the dealer's discount. Happy driving!