How much Car Loan can I afford?
Cars are no more luxury goods and needs to be used daily to get to various places. It has a lot of value in life and almost everyone dreams to have a car of their own. Earlier, a car was an expensive product and buying them was also difficult. The reason it was difficult was the cash inflow as this could not be arranged by all. But with the advent of financial sector, banks have developed many products and ensured that you can easily buy a car or any other expensive product. Cars can be loaned by banks so that it is a cake walk for all. These loans are easy to apply and can be taken by almost everyone.
What is a car loan?
A car loan is an advance payment made by the bank to the car dealer who delivers the car to the buyer. The buyer then makes an equated monthly installment known as EMI on regular basis so that they can close the loan as per the agreed timelines.
What is the profit for the bank?
Banks charge interest on the principle amount to the loan borrower which is the income for them. IT is at an average of 10-12% annually depending on the current REPO rate going on as per RBI. This interest is a good amount for the bank and ensures that it is paid with every installment. There is a ratio of interest and principle which is paid with every installment so that the bank gets repayment for both the components simultaneously.
How do you calculate an EMI?
A car loan EMI is calculated by the bank as per the inputs and it is helpful for the loan borrower to plan for the finances accordingly. However, many loan borrowers wish to know their expected loan amount and EMI even before they apply for a loan. So, how is such an activity possible. The answer is very simple. There are websites of all the leading banks and financial institutions which can be approached and there is a car loan EMI calculator. This calculator can be used on your own to know how much EMI you would be required to pay when you plan to take a car loan. But what are the parameters or inputs on which such a calculator works?
Parameters to Calculate an EMI
There are a few inputs which would help you to calculate an EMI. These inputs are simple and easy to know and can be decided by you as well.
Loan Amount: You should enter the loan amount that you wish to take from the bank or financial institutions so that it can be calculated for EMI generation.
Rate of Interest: The interest rate should be known as per the bank and financial institution to calculate the interest component that you would pay each month for the rest of the tenure. This interest amount would change every month as per the outstanding loan amount.
Tenure: The tenure of the car loan should be mentioned so that the EMI would be calculated as per the period and divided into equal installments to avoid any miscommunication.
All these parameters are useful to know what your actual EMI would be and how much would it cost you to buy a car. There is a ratio set in each month EMI for the rest of the tenure. This ratio is a breakup of the interest and principle so that the bank or financial institution can get much leverage on their interest income. You should look at such ratios so that you know when to pre-close without much penalty. It is also possible that your bank would not charge extra on a pre-closure. All such details and information help you to know how much car loan you can afford in the current situation and what would be your financial status post such an arrangement. Car loans are a common product available with the banks these days. They also offer you a pre-approved loan on your existing account so that you need not run for paper work. Such loans are approved for a fixed amount and the rest would need to be applied as a fresh or extended loan.