When applying for bike finance, the 2 wheeler loan interest rate determines your total loan cost and monthly EMI. While factors like creditworthiness, repayment capacity, income, credit score, and debt-to-income (DTI) ratio play a vital role in deciding your interest rate, a few economic factors are also crucial. That is why interest rates for various loans keep changing from time to time.
If you plan to apply for a bike loan to finance your purchase, let’s examine the economic factors affecting your interest rates. Although most factors are beyond your control, you can time your loan application adequately to get the best deal.
Money Supply
Like other commodities, if the money supply increases, its value decreases, and the interest rates go down. In certain situations, customers chase deposits or bonds in the absence of attractive avenues. If the demand for money decreases at a moment, the interest rates are bound to fall too. The interest rates also go down during times of recession.
For instance, a sudden dip was noticed in bond yields after demonetisation for a short period. As the general public rushed to financial institutions to deposit their demonetised currency, banks had a flood of money. Since they could not lend all the available cash, they invested it in government securities, reducing the bond yields. However, it was a temporary fall that bounced back in a short period.
Government Borrowing and Fiscal Deficit
A fiscal deficit happens when government expenditure exceeds the government revenue. To cover this deficit, the government resorted to borrowing. Since it is the largest borrower in the economy, the loan quantum impacts the money demand and interest rates. A higher fiscal deficit demands a bigger quantum, further increasing the 2 wheeler loan interest rate. Usually, higher fiscal deficits result in higher bond yields in the bond market.
Inflation
All commodities’ prices depend on the economy’s general price hike, known as inflation. The price of money – the interest rate – is no exception. In healthy economic conditions, moderate inflation levels are good because they do not pinch the customers and support business activities. However, sudden high inflation or sustained low inflation is detrimental to the economy.
If the inflation rate increases faster than consumers’ incomes, their purchasing power reduces, and they have to cut down their expenses. Consequently, demand for products decreases, and companies reduce output, leading to a slowdown in the economy. Conversely, sustained low inflation is also bad as it indicates low demand. When the demand is low, their prices must decrease to increase demand. Reduced prices of commodities reduce job opportunities by discouraging fresh investments.
Therefore, the RBI keeps a check on inflation to ensure steady economic growth. Ideally, it keeps the inflation rate between 2-6% to prevent a steep decrease or increase in inflation. For that reason, when the inflation rate is about to go beyond 6%, it reduces the repo rate to increase the cost of borrowing, increasing the 2 wheeler loan interest rate by loan providers. The situation discourages people from borrowing, pulling the demand down. On the contrary, if the RBI anticipates the inflation rate going less than 2%, it decreases the repo rate to decrease the cost of borrowing, helping people borrow loans at lower interest rates.
However, the RBI considers several other factors to determine the repo rate, including economic growth, loan demand, etc.
Foreign Exchange Rates and Global Interest Rates
Considering the rise in the integration of the Indian economy with the global economy since the acceptance of globalisation in 1991, the interest rates must be in line with global trends. For instance, if India wishes to attract international investments, it must increase its commodities’ interest rates according to the global rates. Attractive interest rates attract capital from global investors while supporting the foreign exchange rate. The Central Bank may tweak the interest rates to impact the exchange rate. For instance, when the RBI increases its repo rate, it increases the interest rates in the economy and attracts overseas investors.
RBI Policy: The Reserve Bank of India focuses on various objectives to prepare its monetary policies. Its primary focus in a high inflation scenario is to control it by hiking the interest rates. It curtails the investments and consumption driven by loans. It tries to induce growth during recessions by reducing the interest rate to incentivise investments and loan consumption. Therefore, the monetary objectives of the RBI largely influence the 2 wheeler loan interest rate.
State of Economy
The state of the economy is another crucial factor determining the interest rates. For instance, when the economy is growing, people feel financially confident and safer to take loans. For example, they take more loans to buy bikes, cars, houses, and consumer appliances, thus increasing the loan demand. Since this increased loan demand stokes inflation, RBI increases the loan interest rates to curb it.
On the other hand, a slow economy makes people sceptical about their income. As a result, they are reluctant to take loans. As the demand decreases, companies also cut down their operations and reduce jobs to reduce overhead costs. In such a scenario, the RBI reduces the loan interest rates by lowering the repo rate, making loans cheaper. A combination of all these factors in the state of the economy affects the loan interest rates and your bike EMI.
Some other economic factors may influence the 2 wheeler loan interest rate, including the global economy, government policies, credit market conditions, etc. Hence, staying updated about the latest economic conditions is crucial. Moreover, your credit score plays a key role in determining your interest rate. Use an online two wheeler EMI Calculator to ensure comfortable and prompt loan repayment. By choosing an affordable bike loan EMI, you can better manage your debt and change your loan amount or tenure to get the best loan deal.
Hero FinCorp is a trustworthy bike loan provider financing up to 95% of the cost of a bike at attractive interest rates. However, timing your loan application while considering these economic factors will be helpful in getting the best loan plan suitable to your affordability.
