Thursday, 3 November 2016

How to Understand Car Interest Rates

A long-term car loan that comes with a low interest rate can make buying your favorite car affordable and easy. However, is it wise to just go with any kind of loan? To choose the best auto loan you must know how car interest rates work.
Here are 3 of the most important factors that you must take into account when choosing a car loan-
1) Car loan interest rate- If you will compare different auto loans that are available in the market you will be surprised to see the difference in their interest rates and conditions. For instance, the SBI car loan floating interest rate is 9.65% - 9.70%, of United Bank of India is 10.00% - 10.50%, and of Corporation bank is 10.20% - 10.70%. As you can see there is a good different between them all. Even though the difference is a small percent it can make a big difference in the long term.  According to most finance experts a car salesman can either give you a great deal on your car or an excellent financing. It is rare to get a deal that lets you enjoy the best of both worlds. So, unless you compare car loan interest rates that are available you can’t find the best deal.
2) Getting the Best Deal- Thanks to the high competition and the drive for closing-deals that car dealers have you are often offered incentives from the financer when you apply for an auto loan. However, they can choose to shape the deal the way they want and you have to understand what kind of system works best for you. For instance, if the manufacturer is providing discounts your dealer may instead offer you  lower EMIs. Say, you take a Rs 4-lakh loan at 12% interest rate for 5 years. The EMI will cost Rs 8,810. If the discount provided by the manufacturer is Rs. 25,000 your dealer could reduce it from the loan amount itself, making your EMIs as low as Rs. Rs. 8,200. Or, instead he can decide to tell you that he can give you a lower interest rate of 9%. Comparing the two a lower interest rate is a lot better in the long run.
3) Math of Car Loan Interest Rate
A car loan interest rate is calculated neither on “simple” interest rate system nor on “compound” interest rate system. Instead the interest is calculated on the outstanding amount that changes every month as you continue to pay EMIs that reduce the principal.
To help you understand how the calculations are done here is a schedule that is based on a car loan of Rs. 100,000 for 12 months at a car loan interest rate of 12%-
EMI Number
EMI Amount
Interest
Principal Paid
Principal Outstanding
1.
Rs.8885
Rs.1000
Rs.7885
Rs.92115
2.
Rs.8885
Rs.921
Rs.7964
Rs.84151
3.
Rs.8885
Rs.842
Rs.8043
Rs.76108
4.
Rs.8885
Rs.761
Rs.8124
Rs.67984
5.
Rs.8885
Rs.680
Rs.8205
Rs.59779
6.
Rs.8885
Rs.598
Rs.8287
Rs.51492
7.
Rs.8885
Rs.515
Rs.8370
Rs.43122
8.
Rs.8885
Rs.431
Rs.8454
Rs.34668
9.
Rs.8885
Rs.347
Rs.8538
Rs.26130
10.
Rs.8885
Rs.261
Rs.8624
Rs.17507
11.
Rs.8885
Rs.175
Rs.8710
Rs.8797
12.
Rs.8885
Rs.88
Rs.8797
Rs.0

If your bank is a private bank then the car loan interest rate is reduced on a monthly basis, and if your bank is a nationalized bank then in most cases it reduces on a daily basis.

Choosing a car loan often comes with a trade off. Having small monthly EMIs can be an excellent option if you are on a tight budget but it also means you will be paying a lot extra in the form of interest. On the other hand you can save a lot of money on the interest by paying higher EMIs but it can force you to cut down on your expenses. It all comes down to your own requirements and conditions. At any rate, make sure you compare different car loans before you zero in on one. 

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