How car loan EMI is calculated
Car loans use the same reducing-balance method as other loans. Your loan is the car price minus your down payment. Most banks finance up to 80% to 90% of the on-road price, and rates are usually a little higher than home loans.
Worked example
The 20/4/10 rule of thumb
- 20% or more as down payment.
- 4 years or less as the loan tenure.
- 10% of monthly income or less on the EMI (and under 15% with insurance and fuel).
It is not a rule, but a car loses value quickly, so a shorter loan and larger down payment lower your risk.
Frequently asked questions
How much down payment should I pay?
At least 15% to 20% of the on-road price is a good target. A larger down payment lowers your EMI and total interest.
What is the best tenure for a car loan?
Three to five years is common. Longer tenures lower the EMI but you pay more interest, and the car may be worth less than the loan for longer.
Are there tax benefits on a car loan?
Not for personal use. Self-employed people and businesses may claim interest and depreciation if the car is used for work. Ask a tax advisor.
Does my credit score affect the rate?
Yes. A score above 750 usually gets the best rates.