Thursday, 5 April 2018

How Much Will A 5 Lakh Car Loan Actually Cost U?

Automobile sales have seen a rapid growth in the past decade. A personal car is the first thing that the young generation of today want as soon as they land a job. Most of the car buyers finance their purchase through a bank loan. While entering into an agreement what most people are concerned about is the monthly instalment. But EMI is not the only thing one should be bothered about. One should take into account the total cost of financing a car and compare it across multiple banks before taking a final decision. Find out the rate of interest charged by the bank and their processing charges. Also determine whether you can arrange for the down payment, since most banks give 85-90% of the car value. If you think you can prepay the loan, find out if the bank levies any prepayment charges. A dealer may offer you ad-ons like extended warranty, insurance, theft protection etc. which may further increase the amount that you need to borrow.
Your EMI amount goes towards the payment of 2 components- Principal and Interest. Principal is the actual loan amount that you borrow i.e the car value minus the down payment. Interest is the amount that the lender charges for taking the risk of lending you money. In the initial part of the tenure, the interest component forms a major portion of the EMI.
The cost of the loan depends majorly on the interest rate. This APR varies from individual to individual depending on several factors like CIBIL score, total tenure and whether the vehicle is old or new. A high CIBIL score and shorter loan tenure will help you get better interest rates. The interest rate on loans for new cars is usually less than those for old cars. If you have a low CIBIL score, your APR on the car loan would be higher and that would translate into a higher EMI amount.
You can use the auto loan calculators available online to estimate your monthly payments that you need to pay towards repayment of the car loan. You will need to provide information relating to the loan amount, interest rate, tenure, processing fee etc. and the calculator will give you a breakup of the payments. You can key in different loan tenures to see how it affects the EMI. Usually a longer tern will lower your monthly outgo, but it will increase the total cost of your loan.
Let’s take an example of an HDFC car loan. The factors that affect the HDFC car loan eligibility include income level, tenure, CIBIL score and prior relationship with the bank. Your CIBIL score plays a crucial role as it helps in determining the HDFC Car loan interest rate.  A high score is an indication of low risk for the banks and helps in getting discounted rates. HDFC offers upto 100% of car loan value for a tenure ranging between 1 to 7 years. One can use the EMI calculator to get an estimate of the EMI. Say the amount is Rs 5 lakh, and the HDFC Car loan interest rate is 9.25% for a new car. One can fill in these details and find out the EMI amount for different tenures.

2 years
3 years
5 years
7 years
EMI on 5 lakhs @9.25%
Rs 22,900
Rs 15,958
Rs 10,440
Rs 8,108
Total amount you pay to the bank
Rs 5,49,600
Rs 5,74,488
Rs 6,26,400
Rs 6,81,072
Total interest payment
Rs 49,600
Rs 74,488
Rs 1,26,400
Rs 1,81,072

The EMI amount is more if you choose a shorter duration. As the loan tenure increases the EMI amount decreases. But with a longer tenure you end up paying a higher interest amount. For a 5 lakh loan you pay Rs 49,600 as interest over a span of 2 years. But with a loan tenure of 7 years the total interest cost comes to Rs 1,81,072. So choose a loan tenure wisely. You will need to strike a balance between EMI affordability and interest expenses.

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