How to Choose a Car Loan
A car loan looks simple: pick an EMI you can afford. But the down payment, tenure, rate and fees together decide what the car really costs you. This guide shows how to read an offer and compare two. You can test your own numbers on our car loan calculator.
Key takeaways
- The lowest EMI is not always the cheapest loan. A longer tenure lowers the EMI but raises the total interest.
- Look at the total cost: down payment, all EMIs and the processing fee.
- The 20/4/10 rule is a handy guide, not a rule.
Down payment
Your loan is the on-road price minus the down payment. Most banks finance up to 80% to 90% of the on-road price. A down payment of 15% to 20% or more is a good target: it lowers your EMI and total interest, and a car loses value quickly, so a bigger down payment lowers the risk of owing more than the car is worth.
Tenure
Three to five years is common. A longer tenure lowers the EMI, but you pay more interest and the car may be worth less than the loan for longer.
Interest rate and processing fee
Car loans use the reducing-balance method, and rates are usually a little higher than home loans. A score above 750 usually gets the best rates. The processing fee is paid once when the loan is sanctioned and is usually not refundable, so include it in your comparison. Also ask about prepayment or foreclosure charges, which are common on car loans, and about insurance or other add-ons that raise your real cost.
Worked example (illustrative)
A ₹10,00,000 car with a 20% down payment needs a loan of ₹8,00,000. At 9.5% for 5 years with a 0.5% processing fee (₹4,000):
- EMI is about ₹16,801 a month.
- Total interest is about ₹2.08 lakh.
- Total cost of the car, including down payment, EMIs and fee, is about ₹12.12 lakh.
Changing only the tenure, with the same rate and fee:
- 3 years: EMI about ₹25,626, interest about ₹1.23 lakh, total cost about ₹11.27 lakh.
- 4 years: EMI about ₹20,099, interest about ₹1.65 lakh, total cost about ₹11.69 lakh.
- 5 years: EMI about ₹16,801, interest about ₹2.08 lakh, total cost about ₹12.12 lakh.
- 7 years: EMI about ₹13,075, interest about ₹2.98 lakh, total cost about ₹13.02 lakh.
Stretching from 4 to 7 years cuts the EMI by about ₹7,000 a month but adds about ₹1.33 lakh to the total cost.
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).
Treat it as a guide. In the example, a 4-year EMI of about ₹20,099 fits the 10% limit only if your monthly income is around ₹2 lakh or more. If it does not, consider a cheaper car, a bigger down payment or a longer tenure, knowing the cost.
Comparing two offers
Use the same loan amount and, if you can, the same tenure, so you see the effect of rate and fee alone. Then compare total cost. Take a larger loan example: ₹30,00,000 over 20 years. Loan A at 8.5% with a 0.5% fee costs about ₹62.63 lakh in total. Loan B at 8.75% with no fee costs about ₹63.63 lakh. Loan A is cheaper by about ₹99,000, even though its EMI is only about ₹477 a month lower. The loan comparison calculator does this for any two offers.
Before you sign
- Ask for the full repayment schedule and all charges in writing.
- Check whether the rate is fixed or floating.
- Compare at least two or three lenders.
- Do not stretch your budget just because the EMI looks small.
Personal-use car loans do not normally give a tax benefit. Self-employed people and businesses may claim interest if the car is used for work, so ask a tax advisor.
Try the calculator
Car Loan CalculatorCompare Two Loans
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.
Does a lower rate always win?
Not if the other fee is much higher. Compare the total cost, which includes the processing fee.
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.