If you're considering purchasing a car but don't have the cash upfront, a car loan can be a viable solution to help you drive away in the vehicle of your dreams. However, before diving into the world of car loans, it's essential to understand how your Equated Monthly Installment (EMI) is calculated.
What is Car Loan EMI?
EMI stands for Equated Monthly Installment, which is the fixed amount you pay to your lender every month until your car loan is fully repaid. This amount comprises both the principal amount borrowed and the interest charged by the lender.
How is Car Loan EMI Calculated?
Car loan EMI calculation involves three primary factors:
- Principal Amount: This is the total amount borrowed from the lender to purchase the car. The higher the principal amount, the higher your EMI will be.
- Interest Rate: This is the rate charged by the lender for borrowing the principal amount. The interest rate can be fixed or variable, depending on the terms of your loan. A higher interest rate will result in a higher EMI.
- Loan Tenure: This refers to the duration over which you'll repay the loan. Typically, car loan tenures range from one to seven years. The longer the tenure, the lower your EMI, but you'll end up paying more interest over the loan's lifetime.
Formula for Car Loan EMI Calculation
The formula used to calculate car loan EMI is:
EMI = [P x R x (1+R)^N] / [(1+R)^N – 1]
Where:
EMI = Equated Monthly Installment
P = Principal Loan Amount.
R = Monthly Interest Rate (Annual Interest Rate divided by 12).
N = Loan Tenure in Months
Example Calculation
Let's say you borrow 20,000/- for a car loan with an annual interest rate of 8% for a tenure of 5 years.
- Principal Amount (P) = 20,000/-
- Annual Interest Rate = 8%
- Monthly Interest Rate (R) = 8/12 = 0.00667
- Loan Tenure (N) = 5 years = 5 x 12 = 60 months
Using the formula:
EMI = [20000 x 0.00667 x (1+0.00667)^60] / [(1+0.00667)^60 – 1]
≈ 396.65/-
So, your monthly EMI would be approximately 396.65/-
Conclusion
Understanding how car loan EMI is calculated empowers you to make informed decisions when financing your vehicle. By considering the principal amount, interest rate, and loan tenure, you can budget effectively and choose a loan that suits your financial situation. Always remember to compare loan offers from different lenders to find the most favorable terms for your car purchase journey.
