First, the good news: Private sector banks have started reducing auto loan rates by 5075 basis points. ICICI Bank, the country largest private sector bank, cut auto loan rates by 25-50 basis points. Its rates are now 9.5-11.5 per cent. Within a day, Axis Bank announced a cut of 50-75 basis points in auto loan rates to 1010.5 per cent. The rates are fixed for the entire tenure of the loan.

In comparison, the country's largest bank, State Bank of India, is offering auto loans at 8.25 per cent for the first year and 10.5 per cent for second and third years, It is charging market rates from fourth year onwards. If a person borrows Rs 4 lakh for five years at 10 per cent, the total interest outgo is almost Rs 1.1 lakh. If the rate is cut by 50 basis points, the saving is Rs 5,880.

Now, the bad news. Most car makers will hike prices soon. Auto companies have told dealers and direct selling agents (DSAs) that they will raise prices after January 20. RS Kalsi, chief general manager (sales), Maruti Suzuki, recently told Business Standard that since prices of essential commodities like steel, aluminum and copper had risen substantially in the last couple of months, the company would be forced to raise prices in the coming few weeks. Market experts said the hike could be in the range of 1-3 per cent. "Those who have booked the car have been told that there could be a rise in prices at the time of delivery," said Reena Wagle of Mangesh Auto Centre, a DSA for HDFC Bank.

Dealers say prices of cars from Honda, General Motors and Fiat have already been raised. For instance, the price of some Honda City variants has been raised by Rs 4,000 while Toyota has made Innova expensive by Rs 15,800-17,900. General Motors and Mahindra & Mahindra have also raised prices. The fall in interest rates can help buyers offset a part of the rise in car prices. Here's how: Toyota Innova (GX eightseater variant) has become expensive by Rs 12,800 in Mumbai. The new price is Rs 10,21,200. If the bank was giving you loan for 85 per cent of the cost, you would have borrowed Rs 854,590 on the basis of the old price.

The total outgo (interest and capital) for a five-year loan at 10.5 per cent works out to Rs 11,02,080. At the new price, you will have to borrow Rs 868,020. Even if the interest rate has been lowered by 0.5 per cent, you end up spending Rs 4,440 more on the overall cost (interest plus capital). But the good news is that cars bought in January have more resale value than those purchased in November-December. This is because in the auto market, the car is valued on the basis of the year of manufacturing. So, a car bought just a month back in December is considered to be one year older.

While car loans have become cheaper, car companies may raise prices in the coming months. But the customer still benefits because of a higher resale value ICICI BANK, the country largest private sector bank, cut auto loan rates by 25-50 basis points. Its rates are now 9.5-11.5 per cent. Within a day, Axis Bank announced a cut of 50-75 basis points in auto loan rates to 1010.5 per cent. The rates are fixed for the entire tenure of the loan.

Source : Business Standard.