A car loan is a sum of money that individuals borrow from banks and other financial institutions for the purpose of purchasing a car. This type of loan is generally structured as instalment loan, and secured by the four-wheeler being bought as collateral. In the event that a borrower is unable to repay the loan, the lending institution will hold legal rights to recoup its losses through the sale of the said vehicle.
Banks and other financial institutions charge an interest at a prevailing rate, which is Marginal Cost of Funds based Lending Rate along with an additional spread, on car loans. The rate charged is usually fixed for the tenure of the loan. The borrower therefore does not have to worry about any rise in the EMIs in future.
The car loan calculator computes the EMI payable on a car loan, on the basis of the details entered by the user. One will need to input the loan amount, interest rate and tenure into the calculator, and the tool will calculate the amount payable by the individual as EMIs. The loan amount here refers to the money borrowed from the financial institution. The interest rate is denoted as a percentage charged by the lender on the loan, and tenure is the time chosen or allotted to repay the loan with the due interest.
The mathematical formula that can be applied to calculate EMIs on car loan is:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
The eligibility criteria to avail a car loan will differ from one lender to another. Listed below is the basic car loan eligibility criteria for some of the financial institutions across the country:
Salaried individuals who are eligible for a car loan
Self-employed individuals who are eligible for a car loan
Source: Axis Bank
Salaried individuals who are eligible for a car loan
Self Employed Individuals and Professionals (Sole Proprietorship):
Source: HDFC Bank
To take an SBI Car Loan, one must be aged between 21 years and 65 years and should belong to one of the below three categories:
| Category | Income Criteria | Maximum Loan Amount |
|---|---|---|
| Regular employee of Central/State Government, PSU, Private Company or a reputed establishment. | Net annual income of applicant and/or co-applicant, if any, combined should be at least Rs. 2.5 lakhs | Forty-eight times of the net monthly income |
| Professionals, businessmen, self-employed, proprietary/partnership firms who are income tax assesses. | Net profit or gross taxable income of Rs. 3 lakhs p.a. (income of co-applicant can be clubbed together) | Four times net profit or gross taxable income as per ITR after adding back depreciation and repayment of all existing loans |
| Person involved in agricultural and allied activities. | Net annual income of applicant and/or co applicant combined must be at least Rs. 4 lakhs | Three times of net annual income |
Source: SBI
There are numerous advantages of using a car loan EMI calculator. Here is a look at a few of them:
The factors that affect car loan interest rates are as under:
Credit score: Credit score is a three-digit number, representing an individual’s creditworthiness. It can range from 300 to 900, and the closer the figure is to 900, the better. Most financial institutions accept applications from users whose scores are 750 and above.
Many lenders also factor in the credit scores while determining the interest rates for their car loan applicants. Those holding high scores are charged lower interest rates, while applicants with low scores end up paying more in interest. It is vital for individuals to strive to improve their credit ratings prior to applying for a car loan as it will give them an upper hand.
| 1 Yr MCLR | Spread over MCLR | Effective ROI | Reset | Processing Fee | Documentation Charges |
|---|---|---|---|---|---|
| 8.70% | 0.35%- 2.60% | 9.05%-11.30% | No Reset | Contnent R1C5 | Rs. 500 |
| Effective ROI | Processing Fee | Documentation Charges |
|---|---|---|
| 9.05%-11.30% | Rs. 3500 – Rs. 5500 | Rs. 500 |
Source: Axis Bank
| Union Miles | Rate of Interest(floating) |
|---|---|
| New 4 Wheeler | 1Y-MCLR +0.50% = 9.05% |
| Old 4 Wheeler (Not older than 3 years) | 1Y-MCLR + 3.50% = 12.05% |
Source: Union Bank of India
| Quarter ended on June- 2019 | Minimum | Maximum | Mean |
|---|---|---|---|
| New Car Loan | 8.90% | 14.50% | 9.99% |
| Used Car Loan | 10.75% | 17.11% | 14.66% |
Source: ICICI Bank
What is the maximum amount of car loan an individual can avail?
The maximum car loan amount approved may differ from one bank to another. Generally, lending institutions approve loan amounts ranging from 80% to 90% of the four-wheeler's on-road price.
Is it necessary to list a loan guarantor or co-borrower for a car loan?
Lenders often only insist on a guarantor or co-borrower when the applicant is not able to meet the eligibility criteria, like monthly income, credit score or age.
What asset is used as collateral when availing a car loan?
Most car loans are secured by the four-wheeler which an individual intends to purchase, or with a financial deposit which would bring down the risk for the lending institution.
What is the tenure of a car loan?
Generally, car loans can be taken for 1 to 5 years. However, some lenders offer tenure for up to 7 years.
Are there any tax benefits that can be claimed on a car loan?
No, there are no tax deductions available on payments made be it interest or principal towards a car loan.
What are the documents required to take out a car loan?
The list of documents required for availing a car loan will vary from one lending institution to another. Identity proof, address proof, bank statement and income proof are some of the common documents that lenders generally insist on.
Is it possible to pre-pay a car loan?
Many lenders do allow prepayment of car loans, however, there are a few conditions associated with it. Pre-payment is usually allowed after completion of a specific loan tenure, and lenders will levy a penalty on this payment.
What are the options for making EMI payments?
The modes of payment available will differ from one lending institution to another. The common modes of payment include standing instruction, electronic clearing service and post-dated cheques.
What happens if EMIs are not paid on time?
It is crucial to pay EMI on a timely basis. Most lenders don’t take any action if a payment or two are missed. However, a borrower will be treated as a defaulter for skipping more than two payments. Here, the lender would have the legal right to seize the vehicle for which the car loan has been availed. Additionally, the individual’s credit score will take a beating, thereby decreasing the individual’s chances of being granted a loan in the future.
Can a car loan be taken for purchasing a used vehicle?
Yes, car loans are granted for buying used vehicles. It is, however, important to note that interest rates for used cars are higher as compared to that of new cars.
