Buying a car is an exciting milestone; however, for most buyers, it basically means taking a car loan. Admittedly, taking out a loan makes owning a car more practical; however, with that practicality comes the responsibility of repaying the amount borrowed through monthly instalments called EMIs (Equated Monthly Instalments).
It is essential to understand your EMI calculations so that you can better plan your finances and avoid any surprises during repayment. There are car loan calculators available online which you can use for this purpose; going through this complete guide below will allow you to understand how to calculate monthly car loan payments and why doing this is important before applying for a loan.
Why Is It Important to Calculate Your Car Loan EMIs
Now that we will see the step-by-step procedure for calculating EMIs let’s understand why it is important to calculate them:
Financial Planning – Once you know your EMI, you may set your budget appropriately and make sure that your day-to-day expenses are within range.
Avoiding Defaults – When you choose an EMI that you can comfortably afford, you minimize the risk of defaulting and having to face penalties.
Lender Comparison – Interest rates and tenures vary from one bank to another and NBFCs. Such EMI calculations enable you to select the cheapest type of loan.
Making Informed Decisions – Knowing how EMIs are broken down makes it easy to choose whether to go for a short duration with high EMI or a long duration with the lowest installments.
Know the Car Loan Components
Initially, in order to calculate the EMIs, one needs to understand the different components that make up the car loan:
Loan Amount (Principal): The amount you borrow from the lender after making any down payment.
Interest Rate: The rate charged by the lender for allowing you to borrow money. Could be fixed or floating.
Loan Tenure: The duration for which you agree to repay the loan usually for a period of anywhere between 1 year and 7 years.
Processing Fee and Costs: One time charges or recurring charges, if any, that would increase the cost ever so slightly.
Learn EMI Formula
EMI calculation formula is:
EMI=P×r×(1+r)n(1+r)n−1 Where:
P = Loan amount (Principal)
r = Rate of interest per month (Annual Rate of Interest divided by 12 and expressed as a decimal)
n=Tenure for which the loan is sanctioned in months
This formula looks complicated at first, but changing and varying tools like the car loan calculator instantly apply it to the scenario and provide results.
Use a Car Loan Calculator for Quick Results:
Manually trying to calculate EMIs with the formula can get confusing if you aren’t comfortable with numbers. A faster way would be to use the car loan calculator offered on most bank or financial portals.
All you have to do is enter:
– Loan amount
– Interest rate
– Loan tenure
After inputting all this information, the calculator will have your EMI, total interest payable, and total repayment amount shown in front of you.
Example:
Loan Amount: ₹6,00,000
Interest Rate: 9% p.a.
Tenure: 5 years (60 months)
According to the car loan calculator, the EMI further amounts to approximately ₹12,455 per month.
This easy-to-use method gives you an idea about the monthly payments plus the total interest you will be paying over the entire tenure.
Adjust Parameters to Match Your Budget
You have full advantage when it comes to using a calculator: You can check out as many options as possible and identify the one that suits you best.
Adjust the Tenure: An increase in tenure would reduce monthly EMI, but it would also increase overall interest paid.
Adjust the Loan Amount: Lesser loan amount would result in lower EMIs, and you achieve this by paying higher down payment.
FACTOR CHANGE: A slight change in the interest rate is much capable of changing the EMIs drastically.
Changing those factors can help you find an EMI that suits your budget.
Prepayment and Foreclosure Are Important Considerations
You may want to make some prepayments on your EMIs or may even foreclose the loan before it matures. Many lenders allow partial prepayments, such prepayments reduce the principal and hence lessen EMIs or shorten the tenure of the loan. But, remember to find out if your lender charges a foreclosure or prepayment penalty for it.
Benefits of Knowing EMIs Before Applying for a Car Loan
Transparency in Borrowing: You enter into an agreement knowing exactly what you are committing to, thereby avoiding surprises down the line.
Avoid Over-Borrowing: Knowing the EMI will help you reasonably decide on the maximum loan amount.
Better Loan Comparison: You can now compare the offers by different lenders on the basis of EMIs you might be required to pay under one or the other.
Repay Stress-Free: When the EMI amount is commensurate with the monthly income, there is zero hassle in repaying the car loan.
Common Mistakes to Avoid While Calculating EMIs
Borrowers sometimes make mistakes while using a car loan calculator, even though it is easy:
Ignoring Additional Charges: Do remember to factor processing fees, insurance, and taxes.
Not Comparing Rates: The first lender you approach may turn out to be costing you additional interests.
Focusing Only on EMI: Low EMI may be exciting, but it will also translate to a longer tenure and will make you pay higher interest in total.
Not Considering Income Growth: When your income grows, you may afford higher EMIs and reduce overall interest by choosing a short tenure.
Final Thoughts
A car loan is the best possible way when you dream of a car. But it should be taken with responsibility. If you calculate your EMIs well in advance, you can commensurate between what is affordable and what fetches to pay higher interest. The car loan calculator really makes these processes much easier, simpler to understand, and accurate.
Whether you are buying your first or second car, taking the time to work out and plan your repayments will give you the less stressful car ownership experience you’ve always wanted. So, always run the numbers before signing any loan agreement, and pick the EMI scheme that fits in with your money goals.