Pre-Owned Car Loan

Fixed vs Floating Interest Rates for Used Car Loan: How to Choose

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Poonawalla Fincorp Team
5/26/25 9:23 AM  | 3 Minutes
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In the market for a pre-loved car and looking up used car loan details? Chances are, you’re wondering if you should pick a fixed interest rate or go for a floating rate. It’s a common and important question, and the answer isn’t always straightforward. So, if you’re looking into a Pre-owned Car Loan and unsure about which structure suits you best, this guide will help you decide.

Fixed Interest Rate: What Does It Mean

When a lender offers you a fixed interest rate, it means the rate won’t change at all during your loan tenure. This is regardless of whether the market moves in favour of lower rates, or if they increase. You’ll pay the exact same amount every month—no surprises, no fluctuations.

Pros:

Fixed EMIs make things a lot easier if your income is stable and you manage a fixed monthly budget. This kind of rate structure is ideal if you like having a clear plan—you’ll always know how much money is leaving your account each month.

Cons:

Typically, fixed rates come at a slightly higher starting point than floating rates since they protect you from future market changes. So, even if the RBI reduces rates or the economy takes a turn in your favour, you won’t benefit from lower interest. You’ll continue paying the same rate unless your loan agreement allows for a reset, which isn’t always common and can involve fees. In addition, some fixed-rate loans come with prepayment charges—this is something you’ll have to consider if you intend on paying off your loan early.

Floating Interest Rate: What Does It Mean 

Unlike fixed rates, floating interest rates are flexible, increasing or decreasing based on various external factors. The movement could be tied to something like the RBI’s repo rate or the lender’s internal rate that’s updated periodically. Essentially, your used car loan’s interest is a combination of these external factors plus a fixed margin decided by your lender.

Pros: 

This structure can be a smart choice if you believe interest rates will drop in the near future, or if you’re okay with a bit of unpredictability. Ideally, your income should be able to accommodate small fluctuations in the event that the tides change. If that’s the case, and if you’re someone who likes to take advantage of market trends, floating rates can offer savings without the need for renegotiation. Floating rate loans also usually allow you to prepay without any penalties.

Cons: 

The rate at which your EMIs increase, or decrease will be out of your hands—if the market rates increase, so do your monthly payments. This volatility is something that you and your bank account need to be prepared for.

Floating Vs. Fixed Interest Rates for Used Car Loan: Differences

To make things clearer, here’s a quick breakdown of the key differences:

  • Stability: Fixed rates give you the same EMI every month, while floating rates can change.
     
  • Market Link: Floating rates move with the market, while fixed rates are unaffected by market trends.
     
  • Starting Point: Fixed rates generally start at a higher point than floating rates.
     
  • Use Case: Fixed is safer when rates are likely to rise; floating can be good when rates are expected to drop.
     
  • Budgeting: Fixed rates are easier to plan around; floating rates need more financial flexibility.
     
  • Risk Factor: Floating can lead to savings or increased costs, which is why they pose a higher risk than the steady fixed rates.

Used Car Loan: Fixed Or Floating? 

Now comes the important part—how to decide what’s right for you. Start by thinking about your income. Is it stable, or does it vary? If your income is predictable and you want peace of mind, fixed might be your best option. This is also a good option if your spending capacity each month is limited, since it allows you to plan each month’s expenses better.

On the other hand, if you’re comfortable with some movement in your monthly outgoings and want to benefit from potential rate drops, a floating interest rate can work well. It’s also a good idea to think about how long you plan to keep the loan. For shorter tenures like 2 to 3 years, the rate difference may not be significant. But for longer durations, the ups and downs of floating rates could add up to meaningful savings, or heavy costs.

For those who prefer a mix of both, look into hybrid loan options; the rate remains fixed for the first few years and then switches to floating. These are designed for people who want stability at first and are open to changes later.

To Conclude 

Choosing between fixed and floating interest rates will affect not just your monthly payments but also how flexible your loan feels over time. What works for someone else might not work for you. The best approach is to look at your own budget, your risk appetite, and what gives you peace of mind in the long run.

Poonawalla Fincorp offers second hand car loans at competitive interest rates in addition to a hoard of other benefits such as an online application process, minimal documentation, flexible repayment options and more. Explore more on the official website and apply now!

Frequently Asked Questions 

Which is better among a fixed or floating interest rate for used car loan?

Ideally, if you anticipate that the interest rates may increase in the future, it is better to opt for a fixed rate. On the other hand, if the interest rates are likely to plummet, a floating rate may offer better flexibility.

What are some advantages of fixed interest used car loan?

One of the most important advantages of fixed interest used car loans is that the monthly EMI remains stable and the interest does not change irrespective of market conditions.

Where can I avail a used car loan at affordable interest rates?

You can easily avail a Pre-owned Car Loan from Poonawalla Fincorp at competitive interest rates and additional benefits such as flexible EMI tenure.

About the Author

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Poonawalla Fincorp Team
Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.
Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.

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