Car loans are gradually becoming more popular nationwide in Tier 2 and Tier 3 cities. A report by Business Standard found that three out of every five Indians in these cities prefer to opt for car loans. This widespread popularity of car loans has increased the demand for the ability to calculate EMIs before taking loans. To solve this problem, most banks and non-banking financial companies (NBFCs) now provide online EMI calculators. However, some may still question the accuracy of these EMI calculators.
How a Vehicle EMI Calculator Works
To gauge the accuracy of car loan EMI calculators, you first need to understand how these calculators work. They are dependent on three main inputs. These are the loan amount, tenure, and the interest rate. Once you put in these values, the EMI calculator is programmed to use the EMI calculation formula and give you an accurate EMI amount for your vehicle loan.
Factors That Impact Accuracy
Some factors can affect the accuracy of EMI calculations when using variables like loan amount, loan tenure, and interest rate.
- Interest Rate Variations
There may be variations in the interest rate you enter into the vehicle EMI calculator. If this interest rate is not the same as that offered by the lending bank, it could lead to erroneous EMI calculations. So, verifying the interest rate the lending bank is charging is always better before you begin using an EMI calculator.
- Additional charges
Some banks may apply hidden charges, such as processing, insurance, and documentation fees, which an EMI calculator does not consider. This may lead to some differences in the calculated EMI and the actual EMI you have to pay for your vehicle loan. So, it is always better to add these hidden charges to the calculated EMI.
- Fixed vs. Floating Interest Rates
There could also be discrepancies between the calculated EMI and the actual EMI because of differences like fixed and floating interest rates. Most vehicle EMI calculators can only provide accurate results when working with loans that charge fixed interest rates. So, enquiring from the lending bank before using an EMI calculator is better.
- Prepayment and Foreclosure Options
Some banks may allow you to prepay your vehicle loan in part (partial prepayment) or full (foreclosure). However, an EMI calculator does not consider these changes in the principal of the loan amount that may have occurred due to partial prepayments. So, you should only enter the loan amount into the calculator after adjusting for these changes.
How to Ensure Accurate Vehicle Loan Estimates?
Despite these uncertainties, there are ways to ensure that an EMI calculator provides the most accurate results. Here are some best practices to follow.
- Always enquire about the latest interest rates on car loans from your bank or the lending financial institution. By entering the most current interest rate, you can get more accurate results from an EMI calculator.
- Remember to add the hidden charges and additional fees to the calculated EMI to avoid a sudden financial burden. You can divide the total additional charges by the loan tenure and then add that to your monthly payments.
- Do not forget to adjust the principal of the loan amount if you have made partial prepayments to your vehicle loan. You can do this by subtracting the partial prepayments from your initial loan amount and then entering this adjusted loan amount into the EMI calculator to get more accurate results.
- Always check with the lending financial institution to ensure they offer a fixed or floating interest rate on car loans. If you are offered a floating interest rate, then it is better not to use an EMI calculator.
Final Thoughts
Despite the possibility of inaccuracies in a vehicle EMI calculator, it is still a great financial tool for money management if you plan to take out a car loan.