Availing a car loan to own the dream car is often the most cumbersome and complicated process. The lenders generally charge a higher rate of interest and the car loans become taxing on the monthly budget of a person if he does not balance the monthly installments properly. Both fixed and floating interest rates are associated with the car loans. The person should choose one of them according to his risk-bearing capacity.

The major difference between these two types of interest rates is the variability in monthly payment. When the car loan plan is the fixed interest rate scheme, your EMI does not alter throughout the tenure of repayment. However, in case of floating interest rate, the rates of interest fluctuate according to the situation of the financial market. The interest rate calculation in both the cases is done taking the basis points into account. the payable rate varies with the variation of basis points.

Banks engaged in car financing often change the effective rate by changing the Benchmark rate or Mark-up rate from time to time. When there is a change of 1 percent in the the benchmark rate of 12 percent, the effective interest rate also changes by 1 percent. In this way, the benchmark rate of 11 percent in addition to the mark up rate of 4 percent makes the effective rate 15 percent and this effective rate is lower than the original effective rate. However, banks use their own method to correct the interest rate. Banks generally prefer to change the mark up rate only and maintain the benchmark rate at a constant level. This ensures that the borrower pays a fixed mark up rate for the loan tenure. The borrowers are advised to be careful in choosing the right type of interest rate associated with car financing. They should conduct a small market research on the Internet before making a final decision to avail a car loan.