Keeping that in mind, we have prepared an easy guide for you to go through if you’re planning to purchase a new car and are confused about the loan EMI process, take a look –
Down payment
First and foremost is the down payment amount which you essentially need to put down as a token sum to bring a new car home. The down payment can be as low as 10% of any car’s on-road price, however, we recommend you to aim for putting down at least 30 – 40% of the on-road price. A lower down payment amount would result in a higher loan amount that you have to pay off in the following years, thereby resulting in higher interest. For a car that costs Rs 10 lakh on-road, you should aim for paying about Rs 4 lakh as the down payment, meaning that the pending Rs 6 lakh will be left to be paid in EMIs.
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EMI (Equated Monthly Installment)
The down payment you put down while purchasing a car would leave off the rest of the on-road price as your loan, which you need to pay in EMIs each month. A sustainable EMI should not be more than 20% of your monthly earnings. For example, if you’re earning Rs 1 lakh per month, you would want to reserve about Rs 20,000 maximum for your car loan EMI.
Tenure
The tenure is the time period that you are borrowing the money from the bank for your new car. A lower tenure would mean that you need to pay higher EMIs each month to pay off the loan in that particular time period, and vice versa. However, a lower tenure would also help you save on interest you’re paying on your loan over time. As an unspoken rule, it is suggested to not go for a tenure higher than five years for a new car, while we would recommend you to aim for a three to five year tenure, nothing more than that.
As an example, if you were to purchase a new car that costs Rs 10 lakh on-road, and you end up paying Rs 4 lakh out of that as down payment, the remaining Rs 6 lakh will be the loan amount. On an estimated bank interest rate of 10% and a tenure of three years, you will end up paying Rs 19,360 as the EMI. The total interest accumulated over 36 months would amount to Rs 96,971. Refer to the table below for a better understanding –
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| Car price | Interest rate | Down payment | Tenure | EMI | Total interest |
| Rs 10 lakh | 10% | Rs 4 lakh | 3 years | Rs 19,360 | Rs 96,971 |
| Rs 10 lakh | 10% | Rs 4 lakh | 5 years | Rs 12,748 | Rs 1,64,893 |
| Rs 10 lakh | 10% | Rs 2 lakh | 3 years | Rs 25,814 | Rs 1,29,294 |
| Rs 10 lakh | 10% | Rs 2 lakh | 5 years | Rs 16,998 | Rs 2,19,858 |
Do note that all the values mentioned are indicative and can vary depending on multiple factors.
On the contrary, if you paid Rs 4 lakh for the same car but chose a tenure of five years, your monthly EMI comes down to Rs 12,748, but your total interest shoots up to Rs 1,64,893 over and above the principal amount of Rs 6 lakh. If you were to only pay Rs 2 lakh as the down payment of the same car, your EMI would be Rs 25,814 and total interest Rs 1,29,294 for a tenure of three years. Rs 2 lakh down payment and a five year tenure for a Rs 10 lakh car would bring the EMI down to Rs 16,998 each month, but the interest you pay is a whopping Rs 2,19,858, which is almost 22%!
To sum it up, a down payment of at least 30 – 40% of the vehicle cost, an EMI of not more than 20% of your monthly earnings, and a tenure of not longer than five years. Do you think this thumb rule should be considered while purchasing a new car? Let us know in the comments down below.