Car Loan – Changing the Car Buying Scenario

Consider a scenario when you are in the market to buy a new car. What comes to your mind – you have to zero in on one, go to a dealer, pay the money and drive it out. Simple! Or is it? It may definitely be this straightforward if you are ‘rich’ with a lot of cash to spend. For others, paying upfront for something as expensive as a car is mostly a distant dream. Easy availability of finances in the form of car loans has made cars an accessible item for a lot of people. If not for car loans, a lot of people will not be able to buy a car at all.

Let’s quickly look at what car loans are. A car loan is the sum of money borrowed to buy a car. This money must be paid back with interest, over a fixed duration. EMIs or equated monthly installments have to be paid every month over this fixed duration and these go towards the repayment of the loan. The EMIs are the sum of Principle & Interest amounts and are normally fixed at the beginning of the loan tenure.

As with any other loan, one would like to know how much money he will have to pay as EMIs. An easy way to do this is using car loan EMI calculators. Financial institutions have designed these tools which can help in quick planning and calculation of how much EMI one should pay to buy a car. These can be easily accessed through their websites. Just enter minimal details and you have the results in front of you, no need to do number crunching and straining the brain for it.

Just to give you an idea of what goes into the calculation of the EMI, it will depend on the following factors:

  1. Loan Amount: This is the money borrowed from the bank/financial institution to buy the car.
  2. Interest Rate: This is the money which a bank/financial institution charges to give a loan. There are different ways in which they are calculated. For eg., applying “Flat” on the whole loan amount or in a “Monthly Reducing” manner etc.
  3. Down payment: This is the money to be given as an upfront payment to the car dealer at the time of buying the car. The final figure can either be suggested by the bank/financial institution as per their policy or in certain cases can be decided by the borrower.
  4. Loan term: This is the time period over which the borrowed money must be repaid.

In addition to this, the bank/financial institution may levy processing fees or some other additional charges which will have to be paid to them directly at the time of taking the loan.

In today’s time and age, getting a loan has become extremely easy. One can know his/her eligibility in different ways like contacting the bank’s or financial institution’s contact centre, visiting their branch or simply visiting their websites. These banks/financial institutions also offer various different options in for loan duration, mode of repayment etc. making borrowing and repayment an effortless task. Even the documentation requirements are fairly standard, and the processing time has reduced considerably in past few years. All this has made borrowing money a quick and easy exercise.

Also, there are some benefits of buying a car on loan instead of paying full cash. The cash can be kept aside as an emergency fund and can be used for more pressing needs. Not just this, there is an opportunity cost attached to it. There is always a chance for the person to invest this money in a way that it ends up earning returns more than interest paid on loan. This will lead to a net profit at the end rather than at extra cost.

Car loans have made this extremely important mode of transport easily accessible for the mass audience. Those days are a thing of the past when only wealthy people could afford one and it was more of a luxury than a necessity. Car loans enable everyone to buy a car without putting a big strain on their pockets and thus, is one very important financial product available to all of us.