Everyone dreams of buying a new car or bike, but often people get trapped in the attractive finance offers available at showrooms. Instead of relying on the math told by the dealer, if you just spend 5 minutes using the EMI calculator on your mobile before going to the showroom, you can save thousands of rupees.
This small online tool helps you strike a perfect balance between loan tenure, interest rate and downpayment, thereby reducing the extra interest to the bank to less than half. Avoid being out of pocket by being a smart buyer and decide your monthly installment as per your budget. Come, let us know how this can happen?
Loan Mathematics: How to avoid dealer's trap
When you go to a car showroom, the sales executive there offers you the lowest down payment and long term loan (like 7 or 8 years). This deal looks very attractive because it reduces your monthly installment (EMI) a lot. But this is where common people make mistakes. The longer the loan tenure, the more interest you will pay to the bank.
Online EMI calculator takes you out of this trap. Before going to the showroom, compare the interest rates of different banks and enter the loan amount in the calculator to see how much money is actually going to go out of your pocket in the form of interest.
'Perfect balance' of down payment and interest rate
The most basic mantra to save your hard-earned money is – higher down payment and shorter loan tenure. While using the EMI calculator, follow the three steps given below-
Increase down payment: If you pay 30% to 40% of the total price of the vehicle as downpayment in advance, the loan amount (principal amount) gets reduced. Less loan amount directly means less interest.
Keep the duration short: Always try to ensure that the car loan is not for more than 3 to 5 years and the bike loan is not for more than 2 to 3 years. Adjust the tenure in the calculator to see which EMI suits your monthly income.
Comparison of interest rates: Put the interest rates (ROI) of different banks into the calculator and check how much a difference of 0.5% or 1% affects your total payment.
Understand with a small example
Suppose you are buying a car worth Rs 10 lakh and the bank is offering an interest rate of 9%. Let's see how much difference two different decisions make using an EMI calculator:
| parameters | without planning | smart planning |
|---|---|---|
| down payment | ₹1 lakh (10%) | ₹3 lakh (30%) |
| loan amount | ₹9 lakh | ₹7 lakh |
| loan tenure | 7 years (84 months) | 5 years (60 months) |
| Monthly EMI | ₹14,510 | ₹14,530 |
| total interest | ₹3,18,837 | ₹1,71,777 |
The truth about big savings: Look at the table given above carefully. In both the options, your monthly out-of-pocket installment (EMI) is almost equal (around ₹ 14,500). But by increasing the downpayment by just ₹2 lakh and reducing the loan tenure by 2 years, you directly save interest of ₹1,47,060! This is smart planning done through online EMI calculator.
Also keep an eye on processing fees and hidden charges
After getting an accurate estimate from the EMI calculator, when you talk to the bank or dealer, ask them about foreclosure charges (fees for premature closure of the loan) and processing fees. Many times banks show low interest rates and charge huge amounts in the name of file charges or processing fees. When you know the base figure through a calculator, no one will be able to mislead you financially.
Our advice: In the digital era, it is wise not to take financial decisions hastily while sitting in a showroom cabin. Next time whenever you decide to buy a new bike or car, first of all open the 'EMI Calculator' of any trusted website or bank on your mobile, try different combinations and deal with the dealer with full confidence.