How to calculate the EMI for a Car loan

How to calculate the EMI for a Car loan

A car loan is often the first substantial loan that individuals borrow from a bank or other financial institution. As the name suggests, a car loan is sanctioned for the purpose of buying a car – either new or used. The loan period is for a relatively shorter duration than a home loan, and naturally, the loan amount also tends to be smaller.

If you are planning to apply for a car loan and want to check if it fits into your personal budget, it is simple to check what your EMI will be. Many lender websites offer an online EMI calculator – all you have to do is to input the amount of the loan, the interest rate and the tenure (loan period). You will know your EMI instantly.  

What are the terms used in a typical EMI calculator tool?

Principal – This refers to the loan amount.

Interest rate – Unlike home loans, auto loans have fixed interest rates. This means that you will pay a single interest rate for the entire period of your loan, regardless of market conditions and whether interest rates increase or decrease in the broader economy. Your EMI or Equated Monthly Instalment will be the same every month for the duration of repayment.

Your lender will fix a rate based on, among other factors, the type of vehicle or the loan amount. For instance, the interest rate on a loan for purchasing a luxury car will be lower than a compact car since the down payment made on a luxury car is far larger.  A larger loan amount will attract a relatively higher rate of interest. Similarly, the interest rate on loans for buying a used car is higher than for a new car.

Tenure – This refers to the loan period. For a car loan, it could generally range from 1-7 years.

What is an EMI?

EMI stands for Equated Monthly Instalment. It is the amount you need to pay on a monthly basis, usually on a fixed date, to repay your entire loan. It consists of principal plus interest due, spread over the entire tenure of your loan. If your loan period is 20 years, then you will be paying an EMI every month for 20 years.

 If your monthly EMI burden across all your loans is too high, it can leave you with insufficient funds every month for your other expenses. You can reduce your EMI outflow by lengthening the tenure of the loan.  However, also keep in mind that if you extend the tenure of your loan, you will be paying out more in interest charges since your repayment obligation is over a longer period.

How can I avail of a better interest rate on my car loan?

The best way to be eligible for better interest rates is to have a good credit score. If you are planning to apply for a car loan, obtain a copy of your credit report and check your credit score. You stand a good chance of being offered attractive terms on your loan, including a lower interest rate and bigger loan amount, if you have a credit score of 750 or above.

If your credit score is less than 750, it is a good idea to wait to improve your score before applying for a loan. That way you can decrease the chance of rejection and avail of a better interest rate and repayment conditions. 

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