A car loan will enable you to buy your dream car without having to pay the entire price a lump sum. However, it is important to understand your Car Loan EMI (Equated Monthly Installment) to be able to budget and not strain your finances. This reference manual is a guide towards EMI, what to consider when taking a loan, how to downpay, how to make upfront payments and professional advice on how to be smart about car money.
What is a Car Loan EMI?
An Equated Monthly Instalment (EMI) will be the fixed payment that you make every month to settle your auto loan. Each EMI consists of two components such as principal repayment and interest. The first period has a higher percentage to be used in the interest and as time goes the percentage will slowly change to the principal repayment.
EMI Components
Your EMI includes: Principal (the amount of the loan being taken) and Interest (the cost of borrowing). Because of the shorter loan repayment periods, interest tends to constitute 6070 percent of early EMIs in case of auto loans.
Important Majorities that Influence your car loan EMI.
Loan Amount
The amount of EMI increases proportionally to the loan. Auto loans usually cover 80-90 percent of the ex-showroom price of the car.
Interest Rate
The auto loan rates may vary according to the profile of the borrower, a new or a used car, and the car lender. Such a difference of 0.5 percent is important in short terms.
Loan Tenure
Auto loans are shorter in terms compared to home loans (1-7 years). Increased tenure increases the total interest and reduces EMI.
Car Type & Age
New car rates are more than used car rates. The older vehicles may also have shorter term deposits or higher interest.
How to Calculate Car Loan EMI
The general formula employed by the lenders in calculating EMI:
Practical Example
Affordability & Eligibility Guide
Income to EMI Ratio
To repay it comfortably, keep the EMI of your car no more than 15-20 percent of your monthly take-home salary.
Total Debt Burden
Ensure that your EMIs (personal, home and auto) do not more than 40-50 percent of your net income.
Employment Stability
To most lenders, at least one or two years of consistent employment is required of salaried individuals.
Credit Score
Strive to have a score of 750 or above to get the best rates. The result of the scores lower than 700 may lead to increased interest or rejection.
New vs Used Car Loans
It may help to make informed choice due to the understanding of the differences between financing new and used cars.
New Car Loan
Advantages
- Lower interest rates (7-10%)
- Extended tenure benefits (maximum 7 years)
- Increasing loan-to-value ratio (as high as 90)
- Manufacturer financing deals.
Considerations
- Greater initial year depreciation
- Higher insurance premiums
- Larger loan amount
Used Car Loan
Advantages
- Lower purchase price
- Slower depreciation
- Lower insurance costs
- Shorter commitment period
Considerations
- Higher interest rates (10-15%)
- Shorter tenure (3-5 years max)
- Lower loan-to-value (70-80%)
- Possible maintenance problems
Down Payment Strategy
The amount you pay within the price of the car on the first purchase is referred to as the down payment. A well-considered down payment can have a significant effect on the terms of your loan.
Optimal Down Payment
Deposit down payment of 20 or more. This reduces your loan amount, reduces your EMI and may assist in bargaining the lenders to agree on better interest rates.
Down Payment Scenarios
Minimum Down Payment (10%)
Higher EMI rate and total interest and a lesser initial cost. can require a higher interest rate or increased security.
Standard Down Payment (20%)
Moderate plan and low-interest rates and workable EMIs. Most lenders prefer this ratio.
High Down Payment (30%+)
Less loan value, interest and EMIs dramatically decreased. Ideal in case you have the money saved.
Prepayment and Foreclosure Strategy
It can be very beneficial to pay your auto loan off early and save much in interest although it is necessary to know the terms and timing.
Check Prepayment Charges
Most lenders are charging prepayment penalties of between 2 and 5 percent of the value of the loan. Others provide free prepayment on 6-12 months.
Timing Matters
The best saving will be to pay off the loan before the largest portion of the interest is due.
Part-Prepayment vs Foreclosure
Part-prepayment reduces principal though they retain the same tenure. The loan becomes fully closed in the case of foreclosure.
Calculate Savings
You can also compare the interest savings before deciding on whether to prepay or not.
Car Loan Refinancing Guide
Refinancing your existing auto loan with another lender under better conditions.
When Refinancing is to be considered
Refinancing is a good option to consider in case you have improved your credit score since the time you took the first loan, or current rates are lower by 1 to 2 percent than your current rate.
Refinancing Process
Check Eligibility
Make sure you fit the requirements of the new lender- credit report, income, employment status and age of the car.
Compare Offers
Get quotations of some lenders that involve processing fees, interest rates, and other expenses.
Calculate Net Savings
Processing fees charged by the new lender should also be considered in computing actual savings along with foreclosure charges charged by the existing lender.
Complete Documentation
Submit the required documents, such as your statement of loan, evidence of income, vehicle registration and insurance. Tax Relations on Car Loans.
Tax Considerations for Car Loans
You can also use awareness of the tax implications of your auto loan to assist in financial planning.
Personal Use
In India, interest and principal payments on personal car loans cannot be deducted as part of taxes.
Business Use
The interest can be expensed as a business expense in case the vehicle is utilized in work-related purposes. Depreciation can also be claimed in accordance with the income tax.
Salaried Employees
Based on your pattern of whether personal or official usage, your car repair may be reimbursed by your employer, but will be partially taxable.
Mistakes When Taking Borrowing a Common Car
Focusing Only on EMI
Choosing the longest term, which carries the lowest EMI without considering the overall cost of interest.
Ignoring Fine Print
Failure to read interest on prepayment, processing fees and other miscellaneous expenses in the loaning agreement.
Ownership Cost underestimation
Failure to include other costs on registration, maintenance, insurance, and fuel.
Not Comparing Offers
Accepting initial offer without comparison of the rates provided by multiple banks and NBFCs.
Frequently Asked Questions
New car rates are usually between 7 and 12 percent depending on your credit score, term, and loan value and the lending institution. The interest on loans of used cars is also higher with a range of 10 to 16 percent.
New cars have a maximum duration of tenure of seven years. Usually, it takes three to five years on used cars depending on the age of the vehicle when the loan is being disbursed
Though there are lenders that finance 100%, they are not very common and have other conditions with high interest rates attached to them. Most lenders require down payment of 1020 percent.
Common documents include identity proof (Aadhaar, PAN and passport), proof of address, proof of income (salary slips of individual who is salaried, ITR of self-employed individual), bank statements, and a car quote of a dealer.
In fact, lenders may prefer some brands and models depending on various aspects such as demand in the market, costs of maintaining them, and resale prices. Terms of financing luxury or premium cars may vary.
Auto loans are not normally transferable. The sale proceeds will have to finance the remaining balance in case you would like to sell the vehicle prior to the loan repayment.
A down payment of 20-30 percent is the best because it helps to trim down on your loan, reduces EMI and could also earn you a better interest rate with your lenders.
The credit score has a great influence on the loan acquisition and interest rates. A rating of above 750 usually receives the best rates whereas, a rating below 650 may receive an increased rate or denied.
Most lenders impose prepayment fee (2-5 per cent of outstanding amount). Others provide penalty free prepayment after a lock in period (generally 6-12 months). Check your loan agreement.
A default will result in interest on late payment, damage to credit rating and subsequent repossession of the car by the lender. Your lender should be contacted as soon as you have payment problems.
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