Car loan: Buying a house is a big financial decision, and for many people, the next important one is buying a car. Many choose to get a loan to fund this purchase. Here’s a simple guideline known as the 20/10/4 rule to help you determine the right car loan amount.
How much loan can you get?
Banks and other financial institutions usually offer car loans covering about 80% of the car’s on-road price.In some cases, lenders might approve loans for the full 100% of the car’s cost. The key factor that determines the loan amount is the Loan to Value (LTV) ratio set by the lender. This ratio indicates the percentage of the car’s total cost that the lender agrees to finance. The borrower is responsible for covering the remaining portion of the car’s cost from their own funds. While many lenders offer LTV ratios of up to 80%, some may provide loans covering the entire 100% of the car’s cost.
EMI payments
When getting a car loan, it’s important to pick monthly payments (EMIs) that fit your budget. Don’t choose lower EMIs and longer loan durations just because they’re available. Only go for these options if they suit your financial situation. Going for lower EMIs and longer loans can mean paying more in interest unnecessarily. On the other hand, avoid higher EMIs if they’ll affect your ability to meet other financial goals each month. No matter how much you borrow, make sure your EMIs are easy to manage and won’t strain your finances.
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For example, if you’re buying a car worth Rs 15 lakh, do you have Rs 7 lakh in savings for the down payment? If you opt for a loan for the remaining Rs 8 lakh, what EMI amount would be comfortable for you? A good credit score (750 and above) can help you get a higher loan amount and better interest rates, states an ET report. People with a credit score above 750 usually get loans covering 80 to 90 percent of the car’s total cost. It’s recommended to put down as much money as possible for the down payment to reduce the size of your EMIs.
So, even if you’re eligible for a higher LTV ratio, think about going for a lower one instead. Choosing a reduced LTV ratio can ease your EMI payments and decrease the overall interest costs of buying the car. It’s recommended that car loan seekers aim for a lower LTV ratio to find a balance that doesn’t affect their liquidity or financial reserves earmarked for important life goals.
Ideally, the total EMIs for all your loans shouldn’t surpass 40% of your take-home pay. Based on your current situation, you can decide how much of this 40% allocation your car EMI can take up.
Moreover, there are several factors to consider before selecting the appropriate car loan.
What’s the 20/10/4 rule for car loans?
The 20/10/4 rule is a guideline often used when getting a car loan:
How much loan can you get?
Banks and other financial institutions usually offer car loans covering about 80% of the car’s on-road price.In some cases, lenders might approve loans for the full 100% of the car’s cost. The key factor that determines the loan amount is the Loan to Value (LTV) ratio set by the lender. This ratio indicates the percentage of the car’s total cost that the lender agrees to finance. The borrower is responsible for covering the remaining portion of the car’s cost from their own funds. While many lenders offer LTV ratios of up to 80%, some may provide loans covering the entire 100% of the car’s cost.
EMI payments
When getting a car loan, it’s important to pick monthly payments (EMIs) that fit your budget. Don’t choose lower EMIs and longer loan durations just because they’re available. Only go for these options if they suit your financial situation. Going for lower EMIs and longer loans can mean paying more in interest unnecessarily. On the other hand, avoid higher EMIs if they’ll affect your ability to meet other financial goals each month. No matter how much you borrow, make sure your EMIs are easy to manage and won’t strain your finances.
ALSO READ | Beware of credit card traps! 6 things you must know to avoid paying extra
For example, if you’re buying a car worth Rs 15 lakh, do you have Rs 7 lakh in savings for the down payment? If you opt for a loan for the remaining Rs 8 lakh, what EMI amount would be comfortable for you? A good credit score (750 and above) can help you get a higher loan amount and better interest rates, states an ET report. People with a credit score above 750 usually get loans covering 80 to 90 percent of the car’s total cost. It’s recommended to put down as much money as possible for the down payment to reduce the size of your EMIs.
So, even if you’re eligible for a higher LTV ratio, think about going for a lower one instead. Choosing a reduced LTV ratio can ease your EMI payments and decrease the overall interest costs of buying the car. It’s recommended that car loan seekers aim for a lower LTV ratio to find a balance that doesn’t affect their liquidity or financial reserves earmarked for important life goals.
Ideally, the total EMIs for all your loans shouldn’t surpass 40% of your take-home pay. Based on your current situation, you can decide how much of this 40% allocation your car EMI can take up.
Moreover, there are several factors to consider before selecting the appropriate car loan.
What’s the 20/10/4 rule for car loans?
The 20/10/4 rule is a guideline often used when getting a car loan:
- It’s a basic rule of thumb for purchasing a car with a loan.
- Allocate 20% of the car’s on-road price as a down payment when booking the vehicle.
- Ensure that the equated monthly installment (EMI) does not exceed 10% of your monthly income.
- Limit the loan tenure to a maximum of four years.
- Remember, this rule may vary for each person based on their monthly income and other financial obligations.
