Two-wheelers are among the best ways to commute through narrow and traffic-congested roads in Indian cities. And, they perform well even on not-so-good roads in the rural areas. This explains the ever-rising popularity of two-wheelers across India. In fact, almost every household in India owns a two-wheeler. While compared to cars, two-wheelers are cost-effective in more ways than one, sometimes buying a bike or a scooter with ready cash may not be an option.
In such situations, two-wheeler loans come to the rescue. But for that, you must understand the loan’s highlights and find the best two-wheeler loan interest rate in the market. Today, we will look at the factors that determine a two-wheeler interest rate in detail.
When applying for a bike loan, the first thing that a financial institution assesses is the credit score. A credit score plays a crucial role in deciding your bike loan interest rate. As a thumb rule, the higher the credit score, the lower will be your bike loan interest rate.
Financial institutions analyse your credit history to figure out how you have paid or are paying off previous or existing debts. If your credit history shows that you have a history of missing EMI payments or have previously defaulted on a loan, your bike loan application will be denied, or you will be charged a higher bike loan interest rate.
Though there are no strict eligibility requirements for a bike loan, your employment or work experience does impact the interest rate on your two-wheeler loan. If you work for a company where your salary is delayed every month, the lender may be hesitant to grant you a loan. And even if it is approved, you may have to pay a higher bike loan interest rate.
To avail of a two-wheeler loan, you don’t have to be in a high-income bracket. However, keep in mind that your higher income qualifies you as a low-risk borrower. It gives the lender an impression that you won’t default on your debt. It implies that the higher the income, the lower will be your bike loan interest rate and vice versa.
The interest rate of any sort of loan works only on one principle that is the involvement of risk. The higher the risk of lending to your profile, the higher will be the applicable interest rate and vice versa. Given this, if you choose a bike that demands a high loan value, the financial institution may charge you with a higher bike loan interest rate.
In a two-wheeler loan, the rate of interest is also derived from the type of bike you are planning to purchase. When determining your bike loan interest rate, the lending institution evaluates the resale value of your bike. The higher the resale value, the lower will be your two-wheeler loan interest rate. This is because, in the event of default, the higher resale value allows the borrower to recoup the entire outstanding dues by auctioning the bike.
The debt-to-income ratio reflects the monthly income you are left with after repaying your total monthly obligations. The majority of financial institutions prefer borrowers with a DTI of less than 50%. This is because the monthly income is used for more than just debt repayment; it is also used to cover basic needs. If you are devoting more than half of your income to loan repayments, you are at risk of defaulting on a two-wheeler loan (if granted) soon. Therefore, the higher the DTI, the higher will be your bike loan interest rate.
Your bike loan tenure plays an important role in determining your bike loan interest rate. The shorter your loan tenure, the faster you will be able to pay off your debt. It implies that the borrower who opts for a bike loan for the shorter term may be able to secure a low-interest loan. However, remember, that shorter tenure increases your EMI burden. Therefore, before making any decision, analyse your budget properly.
Most borrowers add a co-applicant to their application if they don’t meet the lender’s minimum qualifying criteria for a two-wheeler loan. If the co-applicant has a solid credit profile and high income, the lender may grant a low-interest two-wheeler loan.
Documents help lenders to evaluate the risk of lending to your profile. In credit appraisal, the documentation procedure is critical. Review the list of documents required for a bike loan approval before applying for one. If you have all of the appropriate documents when you submit your application, the lender may be able to provide you with a bike loan at a low bike loan interest rate.
Even though the lender provides 90-95% LTV on your bike, choosing a higher downpayment may qualify you for a lower bike loan interest rate. This is because the higher the downpayment, the lower will be the default risk.
Now that you know what factors influence your bike loan interest rate, you can focus on improving it to receive the best bike finance deal possible.