A car is a big ticket purchase, even when you go for the entry level variants in the market. Unless you have significant savings, paying the full price in one go can be a strain on your finances. A car loan helps by spreading the cost over a period, so you don’t have to empty your savings or cut back on daily expenses. Instead of making a huge payment upfront, you can pay for the car in small and manageable monthly instalments. This way owning a car becomes more accessible without adding financial stress.
For example, you want to buy a car worth ₹8 lakh. If you take a car loan at an interest rate of 9% for 5 years, your monthly EMI would be around ₹16,607. This is much easier than paying ₹8 lakh at once.
How car loans work
A car loan is quite simple when you break it down:
- Loan amount and down payment
Banks and financial institutions finance a percentage of the car’s price. This may differ from one institution to another, but it can usually be up to 90% of the car’s value.
- Interest rate
This is the cost of borrowing. Interest rates vary depending on the lender, your credit score and the loan tenure.
- Loan tenure
This is the period over which you repay the loan. It typically ranges from 1 to 7 years.
- Monthly EMI
You repay the loan in fixed monthly instalments (EMIs), including the principal amount and interest.
Understand Your Car Loan EMI
A big question could be circling in your mind about how much EMI you will have to pay monthly. The best way to find out is by using a car loan EMI calculator. This online tool helps you calculate your monthly EMI based on the loan amount, interest rate, and tenure.
To use the calculator, you enter three key details. These are your loan amount, interest rate and repayment tenure. Once you enter these, the tool instantly gives you a breakdown of your EMI. It not only shows you the monthly payment but also how much goes toward the principal and how much is interest. It also displays the total interest payable over the entire loan tenure and the final amount to be paid.
This makes comparing different loan options easier and choosing one that fits your budget.
Factors to consider before taking a loan
Before you apply for a car loan, here are some important factors to reflect on.
- Your monthly budget
The EMI should fit within your budget without affecting your essential expenses. If your salary is ₹50,000 per month and your EMI is ₹25,000, it might become a burden.
- Interest rate comparisons
Different banks and NBFCs offer different rates. Even a small 1% change in interest can make a big difference in the total amount you pay over the loan period.
- Loan tenure
A longer tenure means lower EMIs but higher interest paid over time. A shorter tenure means higher EMIs but lower total interest.
- Processing fees and hidden charges
Always look for additional charges processing fees, prepayment penalties, and foreclosure charges. These are costs that people often overlook.
- Down payment
The higher your down payment the lesser your loan amount and EMI. If you can afford to pay 30-40% of the car’s price upfront, you’ll save on interest.
- Credit score
Your credit score determines your eligibility and the interest rate you’ll get. A high score gets you better loan deals while a low score can mean higher interest or even rejection.
Should you take a car loan or save up?
Many people wonder if it is better to wait and save instead of taking a loan, but the answer really depends on your financial situation. With a car loan, you get to own a car while keeping your savings intact for emergencies or other important investments. That way, you don’t have to put your plans on hold or miss out on the joy of owning a car. A well planned loan makes it easier to enjoy the convenience now without feeling a heavy financial burden.
