Car loan Interest Rates: How to calculate car loan EMI per interest rate?

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car loan interest rates
Source: Business Insider India

Car companies are widely offering cars on loans through banking institutions and private loan organizations as the primary third-party taken into trust. In today’s world, it has become much easier for individuals to purchase automobiles (specifically, Cars) on Loan in order to enjoy the luxury of travelling using a personal vehicle. However, when it comes to car loans, one has to contemplate car loan interest rates that will fit their financial repayment capability.

Source: Money Control

For example, Car loan interest rates for Tesla start from 2.49%. However, this interest rate may increase if the buyer chooses a much modern Tesla Cars and Trucks model. 

Thus, before consenting to a car loan interest rate, one must know how to calculate car loan EMI as per the interest rate. Why so? Well! By doing this calculation, you can see an accurate interest amount that you will have to pay on the top of the Car’s actual monetary value.

In terms of decision making, a beforehand calculation is a positive step. The reason being, it tells the buyer, how much interest he will be required to pay per month to the bank or the leasing co.? If the EMI payment per month is higher than your calculated budget, you can get into some very serious financial troubles. 

car loan interest rates 2020
Source: CARS24

So, without any delay, let’s discern how you can evaluate EMI per month as per the car loan interest rates set by the seller or banking institution.

How to calculate EMI as per Car Loan Interest Rates? 

To begin with, loans of high value are called amortizing loans. (But, it does not include a personal loan). Amortizing loans are the types of loans that are payable on the monthly based EMI system. Thus, while taking a car loan, you will be asked to pick the following as per your preference: 

  • Loan Term
  • The principle amount of Loan
  • Repayment Plan
  • Repayment amount 

So, before you calculate the EMI amount per month on your car loan, it is significant to calculate the entire repayment amount. Meaning, the overall payment you will need to make throughout the loan term. To understanding this, let’s review the following guide:

How to calculate the final repayment amount on the Car loan?

To comprehend this mathematical guide, let’s suppose the following:

The principal value of Car = $100, 000

Thus, the initiating loan amount = $100, 000

Car loan interest rate = 6%

Suppose, loan term = 30 years (i.e., 360 months)

So, calculated per month EMI on this Car loan will be $599.55.

Mistakes people make while calculating repayment amount: While calculating repayment amount, loan takers simply calculate the total value of all EMI(s) they will be paying for the next 30 years. Thus, according to their calculation, the Repayment Amount will be equals to $599.55 * 360 = 215, 838 USD. Now, this method of calculation is entirely wrong. The reason being, in this calculation, interest payment has not been deducted each month from the EMI per month. So, what is the right way to do this calculation? Let’s take a glance: 

Source: ET Money

The right way to calculate the repayment amount:

First of all, it is significant to state that, interest payment as per the car loan interest rate decreases each month. The reason being, the loan principal amount keeps decreasing. Why does the principal amount decrease? When you make EMI per month, the interest payment is deducted from the same. Rest of the EMI money goes to the principal amount repayment. To comprehend keenly, check out the following calculation on a monthly basis:

Month 1 of loan repayment:

The principal value of Car = $100, 000

Thus, the initiating loan amount = $100, 000

Car loan interest rate = 6%

Thus, interest payable = principal amount * (6% of principal amount/12) = $500.

Here, we have divided the interest rate by 12 because our loan term is given in years. But, we are calculating the interest rate payable for the 1st month only. 

EMI = $599.55 (calculation given in the next section)

Now, for the 1st month, you paid $599.55 EMI. 

From EMI, Interest payable for 1st month remains deductible. Thus, it’d be $599.55 – $500 = $99.55.

After the deduction of interest payable for 1st month, the rest “99.55 USD” are deducted from your final principal amount balance. Consider this: you paid $99.55 to pay the principal amount. Thus, for the next month, loan amount will be = $100, 000 – $99.55 = $99, 900.45.

Month 2 of loan repayment:

The principal value of loan (minus, repayment made on first month) = $99, 900.45

Car loan interest rate = 6%

Thus, interest payable = end balance principal amount * (6% of principal amount/12)

                                          =.99, 900.45 * (0.06/12)

                                          = 499.50 USD.

Here, we have divided the interest rate by 12 because our loan term is given in years. But, we are calculating the interest rate payable for the 1st month only. 

EMI = $599.55 (calculation given in the next section)

Now, for the 2nd month, you paid $599.55 EMI. 

From EMI, Interest payable for 2nd month remains deductible. Thus, it’d be $599.55 – $499.50 = $100.05.

After the deduction of interest payable for 2nd month, the rest “100.05 USD” are deducted from your END BALANCE principal amount. Consider this: you paid $100.05 to pay the (left) principal amount. Thus, for the next month, loan amount will be = $99, 900.45 – $100.05 = $99, 800.4.

Month 3 of loan repayment:

The principal value of loan (minus, repayment made on first month) = $99, 800.4

Car loan interest rate = 6%

Thus, interest payable = end balance principal amount * (6% of principal amount/12)

                                          =.99, 800.4 * (0.06/12)

                                          = 499.00 USD.

Here, we have divided the interest rate by 12 because our loan term is given in years. But, we are calculating the interest rate payable for the 1st month only. 

EMI = $599.55 (calculation given in the next section)

Now, for the 3rd month, you paid $599.55 EMI. 

From EMI, Interest payable for 3rd month remains deductible. Thus, it’d be $599.55 – $499.00 = $100.55.

After the deduction of interest payable for the 3rd month, the rest of “100.55 USD” is deducted from your END BALANCE principal amount. Consider this: you paid $100.55 to pay the (left) principal amount. Thus, for the next month, loan amount will be = $99, 800.4 – $100.55 = $99, 699.85.

Month 4 of loan repayment:

The principal value of loan (minus, repayment made on first month) = $99, 699.85

Car loan interest rate = 6%

Thus, interest payable = end balance principal amount * (6% of principal amount/12)

                                          =99, 699.85 * (0.06/12)

                                          = 498.49 USD.

Here, we have divided the interest rate by 12 because our loan term is given in years. But, we are calculating the interest rate payable for the 1st month only. 

EMI = $599.55 (calculation given in the next section)

Now, for the 4th month, you paid $599.55 EMI. 

From EMI, Interest payable for 4th month remains deductible. Thus, it’d be $599.55 – $498.49 = $101.06.

After the deduction of interest payable for the 4th month, the rest of “100.55 USD” is deducted from your END BALANCE principal amount. Consider this: you paid $100.55 to pay the (left) principal amount. Thus, for the next month, loan amount will be = $99, 699.85 – $101.06 = $99, 598.79.

In this way, keep calculating the principal amount ending balance until it becomes zero. In the 360th month, the principal loan amount will be zero. 

Some significant points to note: 

  • Principal loan amount ending balance keeps decreasing from the 1st month to the ending month of the loan term. 
  • Thus, the interest amount payable per month in the future will also keep decreasing. 
  • Only EMI per month will remain the same until the end of loan repayment. 

How to calculate EMI Amount per month as per Car loan Interest Rates? 

To calculate EMI Amount as per the loan amortization formula, check out the following guide:

EMI per month on Car loan = [P x R x (1+R)^N]/[(1+R)^N-1]

Here, P = Principal loan amount = $100, 000.

R per month = Interest Rate/12 = 6%/12 = 6 / 100*12 = 0.005

N = Number of total installments payable = 30 years = 360 months

Thus, the final calculation will be, 

EMI = [100000 x 0.005 x (1+0.005)^360]/[(1+O.OO5)^360-1]

         = [ 500 x 1.005 ^ 360] / [(1.005) ^ 359]

         = $599.55. 

Calculate EMI using Microsoft Excel

In the event that you are calculating EMI(s) for thousands of loan applicators for a large scale organization, the physical calculation can be a challenging process. Thus, you can apply the following formula in excel sheet. 

EMI = PMT (Principal amount / 12, (Loan Term * 12), – Principal Amount)

PMT here stands for Periodic payment for annuity investment

Use EMI Calculator Online

Bank of America Car Loan EMI Calculator is the best alternative if you desire to get quick results. All you need to know is the current car loan interest rates (in-consideration) by your loan lender such as co., banking institution, etc. here is how to calculate EMI using Bank of America EMI Calculator:

  • Go to https://www.bankofamerica.com/auto-loans/auto-loan-calculator/
  • Enter the principal loan value in the first column. 
  • Next, enter the preferred loan term (in months)—for example, 24 months for loan repayment in 2 years. 
  • Enter the expected interest rate. 
  • Click on the “Calculate payment” option at the bottom. 
  • The final EMI payable per month will be visible on the right. 

Epilogue

For quick mathematical whizzes, connect with us online. 

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