Car Loan EMI Calculator- A Guideline for Car Loan | Spring Money

A car loan is considered to be the third most popular of all other types of loans that we take in India, after home and personal loans. And more than 75% of new car buyers take a loan for it, while less than 20% of those who buy used cars, go for the loaning option. Obviously, used cars being a lot cheaper could be one main reason for that.

But by putting the above car loan data, we aren't discouraging anyone, or saying that buying a car is all about luxury, and is something that isn't required. In fact, we agree that having at least one car in a family is a basic necessity for most. Be it a regular commute to your office, an outing for dinner or shopping with family, planning a long trip to Manali, Goa or any other location, and most importantly protecting us from the cold, rainy and scorching sunny weather, a car provides us with comfort and privacy that we can’t expect much in public transports.

Seeing this, we have provided you all with this Car Loan EMI Calculator. This will help you calculate the monthly instalments(EMI) based on the amount, interest rates and loan tenure that you choose, without demanding much effort and time. This car loan EMI calculator will also help you know the actual amount that you will be paying for your car if you are buying it on loan.

Components in Car Loan Process

It’s important for you all to understand the meaning of terms that are used in the Car loan process.

Car Loan EMI

Equated monthly instalments, commonly known as EMIs, are the amount of money you need to pay to the lender or the party that has paid for your car from their credit. As the full form suggests, the EMI is paid on a monthly basis. A certain portion of the EMI is the principal amount and the remaining is the interest amount.

Tenure

It is basically the time span in which the borrower has to pay the EMIs to the lender. The maximum tenure that most lenders give for the repayment of the loan is 7 years.

Principal Amount

The principal amount is basically the amount of money that you have borrowed from the lender to buy a car.

Total Principal amount throughout the tenure = Sum of all EMIs in tenure - Total interest paid in tenure Monthly Principal amount = EMI- Monthly interest payable.

Rate of Interest

This is the rate that the banks or lenders charge from the borrowers. This rate is in percentage form, which is generally calculated on the remaining principal amount and is then divided by 12 which represents the number of months in a year. And now this amount will be considered as the interest payable in the next month’s EMI.

Interest Amount

Now we know that the banks and other loan givers charge some interest rates on the amount they are giving to the borrower. The amount that we pay, above the principal amount is the interest amount.

Total Interest amount = Sum of all EMIs in tenure - Total Principal amount paid in tenure Monthly interest amount = EMI - Monthly Principal paid.

Total Amount Payable

This is the total amount or the sum of all EMIs that we pay back to the lender throughout the tenure. Total Amount Payable = Sum of all EMIs in tenure = Total Principal amount paid in tenure + Total Interest paid in tenure.

Cess Charges

Banks or lenders charge this one-time processing fee for car loans. This is generally around 0.25 to 0.50% of the principal amount, or it could be as decided by the lender.

Above we said that having a car is more like a necessity rather than a luxury. But we see a lot of people couldn't even decide what loan tenure is good for them or how much should be the downpayment amount as per their finances. Moreover, some can’t even think of what car they should buy considering their usage and budget. But don’t worry, in this blog, we will cover all important factors, from choosing a car to taking delivery from the showroom, and obviously, everything related to car loans in between.

Guidelines to follow before buying a Car on EMI or Loan

Choosing a Car for Yourself

I have seen people and families taking months in finalising the car. However, there is nothing wrong with that because we don’t buy a car every year so taking time isn't bad at all. But what I feel wrong about is making impulsive and unthoughtful decisions while buying a car, and ending up buying one which either is too costly for you, or is not fulfilling your utility, or maybe both.

To make you understand this let me tell you a real-life story of someone I know.

Last year in 2022 when I was in Bangalore staying at my friend’s place for a few weeks, I meet her cousin who was married. During the pandemic, the couple went back to their hometown like everyone else and saved a good amount of money. After returning back to Bangalore the first thing they did was to buy a Tata Harrier SUV.

Now I am not sure if it was because of having enough money in their account or if it was just an impulsive decision but what I was sure about was that they were regretting this decision, and were not happy paying ₹31 thousand EMI. The main reason that I realised was, first of all, they actually did not require that much expensive and big car for them. Second, due to heavy traffic in the city, they could rarely take their car out, and I understood that when I saw that the car was driven just around 600 kilometres in 4 months.

Now don’t take me wrong, I am not saying that you shouldn't buy an expensive car. We all have aspirations in life and it’s very normal if someone has a goal or a dream to buy a massive and expensive SUV. But you should prepare your finances first, and decide whether it’s a wise decision or not. I am very much sure if that couple would have bought a hatchback like, Tata Tiago or some mini SUV like Tata Nexon or Hyundai Venue, or any other car it would have decreased their downpayment and EMI liability by at least 50 to 60% and would have also fulfilled their purpose of having a car.

Things to keep in mind while choosing a suitable Car

You should do the following 2 things;

First- Understand for what purpose you need this car. Are you going to use it only within the city traffic, or do you need a car to travel on highways mostly? How many members do you have in your family? How often do you feel the requirement of a car? If you think you won’t be driving it much, having an affordable one or going for a used car could be a wiser decision.

Second- From a financial perspective, the amount of money you are putting into buying a car, which is the downpayment and EMIs depends on your personal finances, like your earnings, expenses and liabilities. You should think of them when buying a car, and ask yourself, if is it a sensible decision, or if you are overspending, just because someone in your surrounding bought a new expensive car.

Trust me I have seen people selling their new cars in just a few months or years because the EMI, service and maintenance, and rising fuel prices are disrupting their finances. And in most such cases, it seems like it was an impulsive decision.

Maximum Car Loan EMI You Should have

As we mentioned above that the car loan EMI and downpayment depend on everyone’s personal finances. However, there is one thumb rule for deciding the right amount of Car loan EMI and downpayment, which says that your EMI/monthly instalments should not be more than 15% of your monthly earnings, or your family’s monthly earnings. This means if you are buying a car for the entire family you can consider the monthly earnings of every family member, like your spouse’s. But don’t consider the pensions of retired parents, or even their income if they are too close to their retirement.

Minimum Downpayment amount You should pay

Borrowing more money for car loans will increase the tenure and the interest rates. Hence you should pay at least 20 to 25% of the car’s actual value.

Types of Interest Rates on Car Loans

Now a lot of people don’t know that car loan interest can be of two types- fixed and floating. This may be because a majority of people go for the fixed one and don’t even know about the other option, and representatives from the bank’s loaning department generally never feel the need to tell the client about this.

Here, we will cover every unexplored corner in the car loaning process and will help you understand the difference between these two interest types and which one could be beneficial for you.

Fixed Interest Rates

In the fixed one, the rate of interest on a car loan remains the same throughout the tenure of the loan and it has no effect from market fluctuations.

Floating Interest Rates

On the other hand, in the floating interest rate type, the rate of interest keeps fluctuating as per the market conditions. Due to this, even the EMI keeps changing.

But which one is better?

See we generally take car loans for a maximum of 5 to 7 years, so going with a fixed interest rate option is good, or we can say that the floating interest rate type will not necessarily save us a reasonable amount of money in this tenure. The floating type is better if the loan tenure is at least more than 10 years.

Factors Affecting Car Loan Interest Rates

Credit Score: Your credit score is a report that shows the nature of your repayment history. A good credit score means that your repayment history is good. A credit score of above 700 is generally considered as good. This credit score data is used by banks to understand borrowers' repayment history and the possibility of getting the EMIs on time throughout the tenure. If you have a good credit score then a bank can offer you a lower interest rate, or even you can ask them to lower the interest rate considering this factor.

Car Loan Tenure: If the tenure for the car loan is more the interest rates will be higher because in this case, the lender is having a risk on the money lent for a longer duration. So if possible keep the car loan tenure short. A duration of 3 to 5 years is ideally good.

Income: The lender notices this to understand how difficult it could be for the borrower to pay the EMIs. If your income is much higher than the monthly instalments, the lender could find it less risky and might offer you a car loan with lower interest rates.

Amount of Downpayment: Banks can offer you a loan equivalent to your car’s entire value. But the higher the downpayment, the lower will be the amount that the bank or lender has to lend. Thereby decreasing their risks on capital and due to this, they might offer you a car loan at a lesser interest rate.

Car Model: The car for which we take a loan, also works as collateral in this process. This means if the borrower stops paying the EMIs then the bank or lender will take the car and recover the amount by selling it in the auction. And obviously, the car models that are in demand in India will be valued more in such auctions. Hence the lender could make adjustments in the interest rates based on the model you choose to buy.

Generally, expensive cars (above ₹50 lakhs) attract more interest rates when taken on loan.

Car Type: By the type, we don’t mean SUV, sedan and hatchback, what we meant is whether it’s a new car or a used car. Lenders charge a much lesser interest rate on new cars as compared to used or second-hand cars. For example, if a particular bank is charging an interest rate of 10% on a new car, then the same bank could charge around 13 to 15% for the used car. This is because if the borrower fails to repay the loan the new car will have a much higher value and could be easily sold in an auction for recovery. While the used one might not sell so easily, thereby increasing the chances of capital loss for the lender.

Documents required for Car Loan Process

• Proof of Identity- Aadhar card, PAN card, Passport, Voter id, Driving license or any other identity card issued by the Indian government.

• Proof of Address- Aadhar card, Passport, Voter ID, Driving license, Ration card, bank passbook and utility bills like electricity, and water.

• Bank Statement- 3 to 6 months.

• Proof of Income- Salary slips, Income tax return document and form 16.

• Quotation from the dealer- This is a document you need to get from the dealer from where you are buying a car. This helps dealers to check the authenticity before loan disbursement.

Penalties and Consequences of not paying Car Loan EMI

The following could be the outcomes of missing instalments or failing to pay your car loan EMI;

• It could attract penalties in the form of late fees that will keep increasing with time.

• Failing to pay your EMIs on time more often, will lower your credit score. Due to this, you will face difficulty in getting loans in future or the bank might charge a higher interest rate.

• The lender can send you a notice to repay the outstanding balances, failing this, you will lose possession of your car.

Conclusion

We have listed down several important factors that will help you take a sound decision starting from choosing a car to planning your car loan EMI, downpayment, tenure and other things. In the end, we suggest you avoid increasing your car buying budget on suggestions from your friends and relatives. Understand your needs yourself or discuss them with family members and accordingly fix a budget. We hope that this car loan EMI calculator and guidelines on car loan was helpful to you.

Also, never hesitate in asking for discounts in the form of lowering interest rates and cess charges from lenders, as we do in a car showroom.