Car Loan EMI Formula: Buying a new car for the first time? Memorize this 'magical' formula..
There was a time when buying a shiny new car was considered a hobby only for the wealthy, a status symbol. But today, a car has become more than just a hobby, but a necessity. Especially for middle-class families, it has become a vital means of transportation. Over the past few years, we've seen how people are making cars a part of their lives for their convenience. When it comes to major expenses, bank loans and easy monthly EMIs prove to be a great help to the middle class.
If you're among those middle-class people dreaming of buying their first new car this Diwali 2025, wait! There's a 'magical' formula for you that will not only simplify your car purchase but also make your EMIs a breeze. This formula is 50:20:04. Just memorize it, and see how your budget won't be affected, and your dream will come true.
50: The 'Fifty-Fifty' Rule
50 refers to 50 percent of your annual income. When we see various luxury cars in the market, we're tempted to buy them. We often end up choosing a car that's more expensive than our budget and take out a large loan from the bank to purchase it. This high EMI then ruins our entire household budget. Financial experts clearly state that no one should buy a car that costs more than 50 percent of their annual income.
Let's understand this with an example:
If your annual income is ₹12 lakh, you shouldn't buy a car that costs more than ₹6 lakh. If you follow this rule, your EMI won't overwhelm your budget.
20: The 'Golden' Rule of Down Payment
In this formula, 20 means a down payment of 20 percent of the vehicle's on-road price. Before buying a car, it's crucial to have at least 20% of the vehicle's on-road price as a down payment.
What will happen if you make a 20% down payment?
This will reduce your loan amount and your monthly EMI. Lower loan liability means lower interest and less burden. This is very good for your financial health.
04: Loan tenure, no more than 4 years!
Now let's turn to rule 04. This rule states that the EMI repayment period for the car loan you take from the bank should not exceed 4 years. Often, people extend the loan term in an attempt to reduce the EMI, thinking that paying a shorter EMI will be easier.
But this is where a big mistake is made. While increasing the loan tenure may reduce your EMI, you end up paying a lot more interest to the bank. This means you're at a disadvantage. Therefore, always keep the loan term as short as possible. When buying a car or any other vehicle, it should not exceed 4 years. Repaying the loan within 4 years will save you a significant amount of interest.
Why is it important to follow the right formula?
Buying a car is not just an emotional decision, but also a major financial decision. If you plan incorrectly, the combined EMI, insurance, and maintenance can put a strain on your budget. Therefore, by adopting the 50:20:04 formula, you can not only keep your EMI under control but also maintain long-term financial security.
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