How does car loan EMI calculator work?

Posted by neha sharma on May 10th, 2019

It is easy to get a car of your dreams now with car loans. A car loan is a loan taken to fund:

• A new car
• A used car

Some lenders also give out funds against a car, which means the car is hypothecated to the lender till the time the loan is repaid. A car loan is an excellent way to fund the purchase of the vehicle you have been eyeing. Since a car loan is a secured loan, the interest rates on this type of loan are lesser than other unsecured loans.

With advancements in banking, it is no longer necessary to take a loan to find out the installment amount on it. This installment amount can be found out by using a car loan EMI calculator. This calculator is offered by different lenders free of cost on their websites. It is no longer necessary to manually calculate the installment amount.

How does a car loan EMI calculator work?

A car loan EMI calculator requires three inputs:

• Cost of the car or Principal amount
• Rate of interest of the loan
• Tenure of the loan

Some calculators require the principal amount for the loan. It is to be noted that no lender completely funds the cost of the car. Mostly, lenders finance 70% to 80% of the ex showroom price of the car. The remaining amount has to be paid by the borrower. This is an important point to remember while putting in the principal amount for the loan.

Once these three figures are input, the calculator automatically calculates the monthly installment amount. Some calculators provide additional information such as the total interest paid over the loan tenure, the breakup of the installments into principal repayment and interest payment. Some calculators also provide a loan amortization schedule which shows the outstanding balance and the breakup.

A car loan EMI calculator uses the following formula:

P x R x [ (1+ R)^ N] / [ (1+ R) ^ N-1]

Where:

P= Principal or loan amount

R= Rate of Interest on loan

N=Tenure of loan in years

This formula calculates the monthly installment amount based on the inputs. This formula is not displayed to the user but once these inputs are entered, the calculator automatically calculates the installment amount.

Using a car loan EMI calculator is an excellent option for users looking to borrow to purchase a car. This calculator helps to assess the total interest payout for a car loan and also the impact of the loan tenure on the installment amount. The longer the loan tenure, the greater is the amount of interest that is paid out. Since the user has to input the interest rate on car loan and the tenure, it helps to compare different loan offerings from lenders. That way, it is possible to prepare the loan tenure and the financial burden of EMI every month before applying for the car loan.

A car loan EMI calculator is a simple tool that can help with financial planning and loan comparison. It is highly recommended to use this tool before applying for a car loan.