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.