Finance

# How does car loan EMI calculator work?

What is a car loan?

A car loan is a loan where the funds are used for purchase of a car. There are three types of car loans:

• New car loans:
These loans are taken to buy a new car. Up to 100% of the value of the car is given out as a loan.

• Pre owned car loans:
These loans are for buying a pre-owned car. Some lenders provide up to 100% finance on the value of pre-owned cars as well.

• Loan against car:
In this type of loan, funds are raised keeping the car as collateral. These loans are like personal loans, which mean there is no condition for use of funds.

Most lenders work out an EMI system for repayment of car loan. Before you apply for any type of car loan, it is beneficial to use an EMI calculator for car loan, which will help you estimate the monthly outgo to repay the loan. Only if your financial capability is good enough to absorb the monthly outgo on loan repayments should you apply for a loan. This can be ascertained from a car loan EMI calculator.

How does the car loan EMI calculator work?

The formula for calculating EMI is:

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

The car loan EMI calculator does not display this formula or its calculation. When you input the loan amount, the interest rate and tenure, it shows the monthly outgo or the EMI. Some car loan EMI calculators also show an amortization or repayment schedule for the loan.

The EMI consists of interest on the outstanding principal amount and principal repayment. During the initial period, the interest burden is more and towards the later part of the tenure, the principal repayment is more.

To find out the EMI, you have to input 3 things in the calculator:

• Loan amount you intend to borrow
• Rate of interest for the loan
• Tenure or duration of loan

The best part about an EMI calculator for car loan is that you can change any one input and observe the changes in the EMI. For example, the loan amount can be increased or decreased depending on the model of the car. The rate of interest can be changed depending on the interest charged by the lender. Thus a car loan EMI calculator helps to find out which lender’s loan will be beneficial in terms of EMI outgo.

There are many EMI calculators for car loan available online. Using them is beneficial while planning to take a car loan.