How Car Loan Interest is Calculated?

How Car Loan Interest is Calculated?

Last Updated : Feb. 29, 2020, 3:05 p.m.

The car loan interest is calculated based on three variables – loan amount, tenure and interest rate. You can use the Car Loan EMI Calculator , which is available online, to calculate the interest. Just place the variables at their respective spaces. Afterward, the calculator flashes the EMI, inclusive of interest, on the screen. The Equated Monthly Installment (EMI), which is a combination of principal and interest, is the monthly payment you need to make with respect to a car loan .

Presently, car loan interest rates can be anywhere between 9%-13% for new vehicles and 14%-22% for pre-owned vehicles. Banks can finance at around 85%-90% of the on-road price of new cars and 60%-80% of the value of used cars. You can get a maximum repayment period of 7 years and 5 years for a new car loan and used car loan, respectively.

If you are applying for a 4-year loan worth ₹5 lakhs to buy a new car, what would be the interest liability at an interest rate of 9.50% per annum? The EMI and overall interest would amount to ₹12,562 and ₹1,02,955, respectively, over the course of 4 years.

Needless to speak of, you should negotiate with the lender to get the rates reduced. You can negotiate well if you earn reasonably high, have a credit score of 750 and above and carry an existing relationship with the lender. The lower rates would bring down the EMI and interest outgo to ensure maximum savings.

Don’t opt for a very long tenure as that increases the interest liability considerably. Yes, the EMI comes down with a long tenure. But it’s not advisable because of the massive jump in interest payment. On the other side, a very short tenure can raise the installment amount but would curtail the interest outgo over the period you choose to pay off the loan. Keeping all these in mind, it’s advisable to choose a comparatively shorter tenure to accommodate the EMI with ease. This would also ensure a greater reduction of interest payment.

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