Why Is It Important to Calculate Car Loan EMI Beforehand?

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While applying for a loan, the repayment of the debt is the most integral part of all the aspects that are considered by banks and non-banking financing companies (NBFCs) before the funds are disbursed. Opting for a loan that exceeds the repayment capacity of an individual can not only increase the chances of the loan application getting rejected, but also introduces the possibility of defaulting during the repayment of the debt. Therefore, it is crucial for customers to check their EMIs beforehand and choose a plan that suits their requirement, circumstances, and repayment capability.

Definition of EMI

EMI is the abbreviation for Equated Monthly Installments. When a borrower applies for a loan, he or she has to repay the loan along with an predetermined interest in small amounts distributed throughout the tenure of the repayment. This equal amounts of money that is paid at regular interval towards the loan is known as EMI.

Factors that Impact Car Loan EMI

While taking a car loan, the amount of payable EMI is computed using a number of factors. Therefore, it can vary from customer to customer. In order to calculate EMI, the banks and NBFCs take the following variables into account:

• Loan amount This is the money borrowed by a customer from a bank or NBFC to finance the purchase of a car. The more amount a person borrows, the larger sum he or she has to pay as EMI. An individual might be eligible for a larger amount of loan but actually borrows a lower sum depending on his or her requirement. In this case, the EMI will be calculated based on the money borrowed by the candidate, and not the amount that was originally sanctioned.
• Rate of interest This is the amount charged as interest by the lender while offering a loan. EMIs are directly proportional to the interest rate charged by a bank or NBFC. Therefore, the higher the interest rate, the more you will have to pay as monthly installlments. Since the rate of interest is compounded annually based on the outstanding debt, the amount payable as interest gradually reduces at the end of the term of a loan.
• Repayment tenure This is the duration in which the borrower has to pay the debt through equal monthly installments. Since increasing the term of a loan generally causes the EMI to decrease, it can be said that loan repayment tenure is inversely proportional to the loan EMI. However, extending the tenure might result in a larger interest rate.
• Down payment Down payment is the lump sum money that the customer pays upfront while purchasing a car. Since part of the price of the selected car is paid by the customer, the loan amount also comes down. Therefore, the amount of payable EMI is also reduced.

Formula for Car Loan EMI Calculation

The formula to calculate the EMI of your car loan is mentioned below:

E = P x R x (1 + R)^n / ((1 + R)^n – 1)

Here,

E is the amount of EMI payable

P is the principal amount of loan

R is the rate of interest

n is the number of installments in which the loan will be repaid

EMI Calculation Using Excel Spreadsheet

You can calculate your monthly car loan repayment amount using an Excel spreadsheet. In order to compute your monthly installments with the help of Excel, you will have to do use the predefined function PMT. The syntax for this function is:

PMT (rate, nper, pv)

Here,

pv is the current or principal loan amount

rate is the fixed interest rate of the loan

nper is the number of installments in which the loan will be repaid

Online Car Loan EMI Calculator

Calculating the EMI of your car loan manually using the above-mentioned formula is a tiresome and challenging task along with being prone to human errors. Therefore, you can use a car loan EMI calculator available online instead, and find out how much money you will have to pay each month. All you will need to do is provide the details of your loan such as the loan amount, repayment tenure, and fixed rate of interest. The EMI calculator will give you the correct output without any hassle. While checking your EMI using an online calculator, you will also have the benefit of adjusting the EMI by changing the parameters. Once you have chosen a plan that suits your requirement and circumstances, you can apply for the loan online or offline through a lender of your choice.

Additionally, the EMI computed using an online car loan emi calculator is subject to change due a number of reasons. When a customer opts for a floating rate of interest, the EMI can increase or decrease depending on the fact whether the interest rate increases or decreases. Prepayment of loan and increase in loan tenure are also some of the reasons that can cause the monthly installment amounts to change. Read further to learn why you should calculate your EMI using a calculator before applying for a car loan.

Benefits of Calculating EMI Before Applying for a Car Loan

As part of the loan approval process, banks and NBFCs cross-check the credit history of all borrowers in order to make sure that the candidate does not default with the payment. When you are applying for a loan in order to purchase a car, it becomes your responsibility to repay the entire debt within the predetermined duration. If the debt is not paid back on time, it will impact your credit profile negatively. This, in turn, might affect your loan applications in case you choose to apply for another loan in the future. Mentioned below are the reasons why it is important to use an EMI calculator before applying for a loan:

• Manage your finances better When you use an EMI calculator, you will get to know how much money you will have to pay each month beforehand. This will not only help you manage your finances better, but will also assist you repay your loan on time.
• Decrease your chances of defaulting Learning about monthly installments prior to loan application helps customers apply for a loan amount within their repayment capacity. Additionally, candidates can also opt to extend their loan tenure so as to increase their eligible loan amount or reduce the payable EMI. This can reduce their chances of defaulting significantly.
• Compare the rates of different lenders By using an EMI calculator along with an amortization table, borrowers can evaluate which loan scheme better suits their requirement while offering more advantageous terms such as higher quantum of loan, less interest rates, less repayment tenure etc. Checking the plans by different lenders online can also help them learn about any ongoing offers.
• Decide the loan amount and tenure When a customer uses an online calculator for EMI, he or she has the facility of adjusting the loan amount, tenure, and interest rate as many times as he/she wishes to and find out a plan that suits his/her needs and repayment capability.
• Reduce the chances of loan rejection Since you can adjust the variables in an EMI calculator for a car loan and choose the best plan for yourself that matches your repayment capacity and requirements, the chances of your loan getting rejected also get notably reduced.
• Maintain a better credit profile When you have the ability to choose a scheme that is more suitable to you in terms of repayment, the chances of you defaulting reduces. Therefore, there is less possibility of it turning into a bad credit and helps the individual maintain his or her credit score.

Conclusion

While there are a number of reasons that can impact the EMI of a car loan, calculating the payable monthly installment of a debt can help customers choose a plan that suits their needs and repayment capacity. This, in turn, helps individuals not only opt for the best scheme available in the market according to their requirement, but also decreases their chances of defaulting while maintaining a good credit history. Furthermore, pre-planning the repayment of a loan can also assist the customers in managing their finances better.