How Much Car Loan Should You Really Take?

Car loans have made owning a car affordable. You can even buy expensive cars like Bentley or Maserati on loan! But that being said, it’s important to remember that a car is a depreciating asset. Hence, you should decide how much car loan you should really take based on your liabilities and affordability.

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Use the 50% & 20/4/10 Rule to Decide On Car Budget

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The easiest and most effective way to decide a budget for the new car you want is to employ a combination of 50% and 20/4/10 rule. Here’s what it means.

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The car you buy should cost 50% of your annual take-home salary. For instance, if your annual salary is 12 LPA after all the deductions, you should aim for a car that costs no more than 6 Lakhs (on-road price).

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Now that you know how to eyeball the overall budget of the car, let’s understand how much car loan you should take on. Here, it is essential to be realistic about it. You might already have liabilities like EMIs, personal/education loan repayment, etc.

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If you are confident that taking on an additional loan wouldn’t imbalance your monthly budget, you can employ the 20/4/10 rule. 

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This rule says you should give at least 20% of the cost of the car as a down payment and can finance the rest 80% with the car loan. The per month payable amount should be no more than 10% of your monthly take-home salary, which you should be able to ultimately pay back within four years of purchasing the car.

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Let’s take an example here.

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Suppose you want to buy a Renault KWID in Bangalore, where the on-road price is Rs.5,57,393. 

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You should pay 20% of the car price, i.e., Rs.1,11,478, as the down payment. 

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Finance the rest (Rs.4,45,914) with a car loan.

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Assume you have got this amount on loan at an 8% interest.

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Your monthly EMI amount should be around Rs.10,000 (assuming your monthly salary is Rs. 1,00,000)

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Hence, your monthly EMI against a car loan for four years at an 8% interest would be Rs.10,886.

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If you can afford this monthly EMI amount after considering all your existing liabilities and monthly fixed costs, you should buy the car.

Things to Consider Before Buying a Car Through Loan in India

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Buying a car is not an easy decision to make. There are other factors you should think about before investing in a car. Apart from the loan amount, you should consider if you can afford the monthly EMIs, how healthy is your credit score, if you have job security, and much more.

1. Consider On-Road Price

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When you decide to buy a car, the price of the vehicle is not the only thing you are required to pay. Consider the cost of the license, registration, road tax, insurance, and other required accessories. Car shopping is worthwhile only if you can afford these extra costs.

2. Car Type

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Purchasing a car is both an aspirational expense and a necessity. Hence, you should buy a car for its intended use, not just as a status symbol. A hatchback, for example, is appropriate if you are single or have a family of 3-4. If you have teenagers or pets, a sedan should suffice.

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But if you frequently travel with friends or family, you should consider an XUV.

3. Car Ownership Cost

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Car is a depreciating asset. Hence, you should spend wisely. While budgeting, appraise its on-road price. But it is not the only thing to consider. You should also think about the fuel cost, servicing and maintenance cost, and car insurance premiums. You can set aside 20% of your monthly in-hand salary as the ownership cost. 

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It may seem insignificant while buying, but the constantly rising fuel price and inflation can lead you to miscalculate the overall ownership cost, derailing your monthly budget. 

4. Employment History

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Investing in an expensive yet depreciating asset such as a car is not wise if you have just started your first job. This is because most loan providers want a lengthy job history before approving any loan. Wait at least six months or, ideally, one year before purchasing a car with an auto loan.

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5. A Solid Credit Score

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Your credit score is the most crucial eligibility criterion for getting any loan. Your credit score comprises your previous credit history, credit utilization ratio, length of credit history, new application, and credit mix.

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Ensure you have sufficient employment and credit history, a low credit utilization ratio, a balanced credit mix, and no new credit application to construct a good credit score. You should also ensure you pay your bills on time and do not leave any outstanding balance.

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Consider Your Existing Liabilities

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Consider a few factors before entering the loan cycle to buy a car.

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• How often are you going to use the car? Occasionally to go on trips or for daily commute?
• Do you have any outstanding debts? Personal or educational loan, perhaps?
• How much do you spend on living costs?
• How much money do you invest each month?
• After you’ve paid for everything, how much money do you have left?

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To sum up

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There is no right or wrong way to calculate how much you should spend on your car. It varies from person to person. It depends on your financial health, requirements, and wishes regarding car specifications and usage.

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When your need fits your budget, you can negotiate the final price with your dealer before applying for the car loan. Remember, you may get a better deal if you apply for a car loan from the same dealership. 

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We hope this article has helped you in your decision-making process. For more such insightful articles, do read Jar’s blogs.

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