A car loan from a bank or non-banking financial company enables the borrower to purchase either a new or used vehicle. It is a good choice if you do not have the full amount. Before availing the loan you need to know how the new and Used Car Loan Interest Rate is determined. This will aid you in choosing the suitable loan. Below you can see how interest rates are calculated.

Car Loan Interest Rate is Affected By

The interest rate for car loan depends on various factors like your income and the type of vehicle being financed. Below is the breakdown of the important factors:

• Income

Banks likely offer lower interest rates to higher-income customers since they have the ability to repay the money. A salaried employee is given preference over a self-employed professional simply because there is a consistent flow of funds. However, high-earning self employed professionals can also qualify for favorable rates.

• Loan Tenure

 Shorter loan terms typically attract higher interest rates because and lenders assume that it involves greater risk. A shorter repayment time will help you get a cheaper interest rate, but it will increase your EMI.

• Age of the Borrower

Your age has a significant impact in determining the eligibility criteria and interest rate. Typically, those 21 and older are considered to be low-risk borrowers since they are likely to work for a longer duration without any job interruptions. Older applicants may face higher interest rates due to reduced repayment years.

• Relationship with the Bank

Long-standing customers of a bank often receive better interest rates. A good banking history, including consistent account activity and timely repayments, can work in your favor when negotiating rates.

• Co-Applicant

Adding a co-applicant with a steady income can help you repay your loan faster and pay less in interest. A combined income increases eligibility while reducing the lender's risk.

• Employment Type

Working for a reputable company or being employed in a stable organization can lead to better loan terms. Many banks maintain a list of preferred employers and offer lower rates to their employees due to job security and financial reliability.

• Down Payment

A higher down payment reduces the loan amount and increases the ability to repay the loan amount. Lenders are more willing to give lower interest rates to consumers who contribute a considerable amount upfront since it reduces their risk.

• Existing Liabilities

If you have outstanding debts or financial obligations, your loan eligibility and interest rate may be negatively impacted. Minimal or no existing liabilities indicate better financial health and make you a favorable candidate for lower rates.

Familiarizing with the key elements allows you to prepare and negotiate better terms for your car loan.

How Car loan Interest Rate Calculated?

1. Calculate Car Loan Interest Rate Using Formula

While calculating car loan interest may seem complex, it’s actually simple. Just follow the below steps.

Formula:

The formula for calculating the EMI is:

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

Definitions:

• P: Principal loan amount

• R: Monthly interest rate (annual rate divided by 12)

• N: Number of monthly installments

• E: Monthly EMI

Example Calculation:

For a car loan application for INR 10,00,000 over a period of 24 months and an annual interest rate of 12%.

Change the annual interest rate to a monthly rate  

The monthly interest rate = 12% / 12

= 1% = 0.01.

Apply the formula

EMI = INR 1000000 × 0.01 × (1 + 0.01)²⁴ / [(1 + 0.01)²⁴ - 1]

Calculate the EMI

EMI = INR 47073.

2.      Calculating the Car Loan Interest Rate Using the EMI Calculator

Many banks and other agencies provide Car Loan EMI Calculators which assist in knowing the Equated Monthly Installments taken up by the borrower. The procedure is quick and easy to understand, you need to follow the below-mentioned steps:

• Input Loan Details

In the EMI calculator enter your loan amount, tenure and the annual interest rate.

• Set the Repayment Tenure

Adjust the loan tenure in months or years to match your preferred repayment period.

• Choose the Interest Rate Type

Select between a flat rate and reducing balance interest method, as applicable.

• View the Results

The calculator will display the monthly EMI along with total interest payable, and overall loan cost instantly.

• Compare Scenarios

Spend some quality time and try different interest rates and tenures. This will enable you to opt for the low-cost interest rate.

Aside from this, you can also calculate the Used Car Loan Interest Rate using this EMI calculator thus making it to serve any kind of car loans.

Summing Up

The interest rate can be estimated manually or with an EMI calculator. It is based on your convenience. Just take your time to learn how the new and Used Car Loan Interest Rate are calculated. This will make sure that you make an informed decision that will save you money in the long run.