Banks alter the effective/ actual rate by altering the benchmark or the mark up rate. For instance, if a bank reduces its benchmark rate by 1 percent the effective rate automatically decreases by 1 percent. (12%+2%=14%). Similarly, a bank can also reduce the effective rate by reducing the mark up rate by 1 percent and keeping the benchmark rate unaltered. In such a scenario, the effective rate sums up to 14 % (13%+1%). Often banks reduce rates by changing the mark up rates, keeping the benchmark rates same. This implies that the benefit of revised rates is only passed on to the new customers since existing customers are already locked into their mark up rates.

The other factor is the prepayment charge. The prepayment charges applicable to home loans are around 2 percent of the amount prepaid. Therefore, if there is a huge decline in the interest rates and banks have only altered the mark up rates they have not provided you the benefit of this decrease. In case of car loans, the prepayment charges are around 5 percent.

Therefore, before deciding to opt for a floating rate car loan, consider the differential between the fixed rate and the floating rate, and the prepayment charges. If the differential between the rates is low and the prepayment charges high, going for a fixed interest car loan is a wiser decision.