## Sunday

### Interest Rates

Funny things interest rates. I have a car loan at a fixed rate of interest of 9.75 % taken 2 years back, the car has depreciated at least 30% since then. Around 3 years back we also took a home loan the rate of interest at that time on the home loan was 8.5%  floating rate. Today the rate of interest on the home loan has reached 10.5 %, we actually payed a spread premium to our mortgage company so that we get a better rate, had I not paid that our rate of interest would have been 11.5%. So an asset that is depreciating in nature I am paying a lower rate of interest, while on an asset that has appreciated in value I am paying a higher rate of interest. I am unable to comprehend the logic behind the same.

My understanding is that anything that has a higher chance of default or risk you charge a higher rate of interest. Now just imagine I or anybody has choice between loosing a house and loosing his car which one you would be willing to loose?

Do I smell a rat over here? Are the banks deliberately keeping rate of interest low on car as they know people would be willing to loose a car if the rate of interest crosses a point while borrowers will be less willing to loose a home even if the rate of interest increases beyond a point and the original loan that was for say 20 years now you will be paying for 25 years? I guess they are taking advantage of emotional attachment of borrowers to their homes and charging more, while they know people hardly have any attachment to their cars and will be willing to loose them so are charging less.

Food for thought I would say.

1. Prasad. You have understood the game of Interest Rate as many naive and unaware users do.

The fact that interest have risen for an appreciating asset and reducing for depreciating asset is co-incidental. The interest rates do not depend on this factor.

The thing is that you know the answer, but you are not realizing that you already know it.

in the beginning of the post itself you have clearly mentioned that the loan that you took for your car had a fixed rate of interest. It will not change for the whole duration of the loan.

Whereas, for Home loan, you picked up floating rate of interest. These rates increase / decrease based on the demand and supply of money (read loans) in the economy. Let us say, if bankers feel that there might be high demand for loanable funds, the interest goes up (and vice-a-versa).

So, in essence, if you had taken a floating rate of interest for your car, even it would have risen up to such levels.

2. Hi Dhakkanz: My issue is not with floating rates and I understand the concept fairly well, my issue is where floating rate is being offered and where this choice is not avaialble. The moment the cost of the loan is increased for a depriciating/non emotionaly charged asset no body will be interested in paying back and defualts will increase. But a house being an emotional thing people continue to pay as they do not want to lose their home