Do you actually benefit from floating rate loans if interest rates decline?

The banks do not guarantee reductions in floating rates if the interest rates decline. There is no record to rely on for car loans but things can be inferred from experience with floating rate home loans. As there has been a consistent increase in interest rates for the last 3-4 years, there is no past data for us to check about banks actions when the general interest rates declined.

The most recent duration for which interest rates were on a downward slope was 2001-2003. During this time, banks were slower in reducing the rates s compared to the speed with which they increased floating home loan rates during the years 2004-2007.

A floating home loan rate consists of:

1. Effective rate: This is the actual rate of interest applicable to a particular loan.

2. Benchmark rate: This is a reference rate. It is usually a little higher or lower than the actual rate.

3. Mark up/ Mark down rate: It is the difference between the benchmark and the actual rate.

Suppose the effective rate is 15 percent and the benchmark rate is 13 percent, then the mark up rate is 15-13, 2 percent. In other words the effective rate is the sum of Benchmark rate (13 percent) and mark-up rate (2 percent).