How to Calculate Car Loan EMI | Motilal Oswal

How to Calculate Car Loan EMI




Introduction:

Owning a car is a dream goal for many and is more of a necessity than a luxury in today’s times. Because a car is a practical purchase, many to-be car owners are willing to invest in their desired car despite having other financial priorities. However, not everyone chooses to shell out the entire down payment for a vehicle. Many opt for car loans if they cannot or don’t want to pay the down payment for the car in one go. A car loan is when a bank or a financial institution lends a sum of money or credit to a borrower for a pre-specified tenure. The borrower must repay the borrowed loan within the specified repayment tenure. To make the repayment process easier, lenders follow the practice of taking Equated Monthly Installments or EMIs. 

What are car loan EMIs?

Car loan EMIs are fixed monthly payments that borrowers must repay to lenders from whom they take a car loan. They include the principal amount borrowed and the interest rate the lender charges. The interest rate is the fee lenders charge for providing borrowers with the required funds they want and giving them a reasonable window to repay them. They usually range from 8%-11% per annum and play a huge factor in how to calculate car loan EMIs.  

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How to calculate EMI for car loans 

1. Consider all the factors determining the car loan EMI  

The loan amount  

This is the first deciding factor in calculating car loan EMI. By a simple rule, the higher the loan amount, the higher the car loan EMI. 

The loan tenure 

The tenure of the car loan determines the EMIs. The longer the tenure, the easier it is to make repayments, but the overall interest rate and repayable loan amount become higher. The shorter the tenure, the higher the EMIs but the lower the overall repayment amount. 

The interest rate 

The interest rate plays a crucial factor in how to calculate car loan EMIs. It depends on the loan amount and the rates fixed by the lending institution. Again, the higher the interest rate, the higher the EMIs payable. 

Car loan charges 

Charges levied by the lender will also influence the calculation of the car loan EMIs. These include processing fees, prepayment charges, and foreclosure charges, among others. 

2. Use the standardised formula to calculate the car loan EMI 

Once you have a clear idea of the factors determining the loan EMIs, you must use the standard formula for calculating loan EMIs. The formula for EMI calculation is as follows: 

EMI = [P x R x (1+R) ^N]/[(1+R) ^N-1]

The formula can look intimidating, but here’s the breakdown:

EMI = Equated Monthly Installments Payable 

P = Principal Loan Amount 

R = Monthly Interest Rate Payable 

N = Loan Tenure in Months

Using the formula manually can be time-consuming and give you inaccurate results. Here is where the EMI calculating tool comes in handy. 

3. Use an online EMI calculating tool for accurate results 

An online EMI calculator is the easiest and most reliable way how to calculate car loan EMIs. It uses the standardized formula for EMI calculation while just asking for a few details. These include the loan amount, loan tenure, and the interest rate suited to your needs and budget. Once you enter the details, you can view the results. Most online calculators also provide a concise amortization table with the exact breakdown of the months, principal amount, interest amount, and the ending balance after each payment. Ensure that the bank you choose provides the amortization schedule for the car loan. 

Conclusion: 

Gone are the days when you had to rely on manual calculation and risk running inaccurate results while calculating car loan EMIs. An online calculator makes it easy to calculate your car loan EMI. Not only do they save time, but they are also free to use. You can run various combinations of EMI calculations by inputting different loan amounts, tenures, and interest rates to find the best fit your budget. However, before any financial decision, it is wise to consult a credible financial advisor. The financial professionals at Motilal Oswal can guide you through the entire process of car loan EMIs and understand the T&C in detail. You can also use Motilal Oswal’s easy-to-use EMI calculator for instant and accurate results.

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