What Car Loan Interest Rates Might Be Hiding

With deposits and advances, the first thing that our eyes watch out for are the interest rates. But low interest rates doesn’t necessarily mean the loan is cheaper. There’s much more to a car loan that could include processing charges, inspection fees, documentation charges and some hidden costs. Banks may offer transparent loan processes and charges, but if you are well knowledgeable on the subject, there’s no chance of you being fooled.

Components of the car loan

Let’s take a look at the costs hidden in each component of your car loan.

Principal

The amount sanctioned doesn’t necessarily mean that’s how much you are paying. If you have taken a loan for Rs. 10 lakhs, the cost of the loan depends on your tenure and interest rate.

Using an EMI calculator, we can determine that a 5-year loan at 10.25% p.a. with no processing charges will cost you Rs. 12,82,216. But as a natural instinct, we only take into consideration the Rs. 10 lakhs we owe the bank.

Tenure

The tenure of your loan plays a major role in the cost of your loan. For example, Rs. 10 lakhs at 10.25% p.a. plus 2% processing fees for a tenure of 5 years will cost you Rs. 13,02,216. So the bank will make Rs. 3,02,216 for loaning you Rs. 10 lakhs.

The same loan taken for 10 years, will cost you Rs. 16,22,468. So the bank will make a profit of Rs. 6,22,468.

Interest

A major hidden cost to a car loan is the interest itself. Banks offer interest in terms of percentages and not in monetary terms. Your interest rates may seem low, but over the years you may be paying more interest than you fathomed. Also, if you opt for long loan tenures, your interest payable increases by a drastic sum. Use an Car Loan EMI calculator to determine your interest payable in monetary terms.

EMI

When people seek finance, the first thing they look at is how much the loan will cost them per month. If the EMI fits the budget, the loan is favourable. But this doesn’t mean your loan is the best or cheapest. The total cost of the loan is what you should be looking at. Let’s take a simple loan of Rs. 1 lakh for 1 year, at the rate of 14% p.a., and no processing fees, the EMI will be Rs. 8,979. The total cost of the loan will be Rs. 1,07,745.

If you opt for the same loan for 2 years, the EMI will only be Rs. 4,801. But the total cost of the loan will be Rs. 1,15,231. You will be paying almost double in interest. So if you can afford to pay a higher EMI, it would be favourable in this situation.

Processing fees

Banks charge around 1% or 2% as processing charges on your loan. This looks like a small amount, but if you have opted for an expensive loan with a long tenure, the processing charges will be much higher.

Comparison Table

For illustration purposes, let’s take a car loan at 12% per annum interest. Let’s assume there are no processing charges. The following table depicts the costs of the loan and EMIs for different principal amount and loan tenures.

Tenure	1 year		2 years		3 years		5 years
Loan Amount	EMI	Cost of the loan	EMI	Cost of the loan	EMI	Cost of the loan	EMI	Cost of the loan
Rs. 1 lakh	8,885	1,06,619	4,707	1,12,976	3,321	1,19,572	2,224	1,33,467
Rs. 5 lakh	44,424	5,33,093	23,537	5,64,882	16,607	5,97,858	11,122	6,67,333
Rs. 10 lakhs	88,849	10,66,185	47,073	11,29,763	33,214	1,95,715	22,244	13,34,667
Rs. 20 lakhs	1,77,698	21,32,371	94,147	22,59,527	66,429	23,91,430	44,489	26,69,334

We can clearly see from the table above, that the longer the loan tenure, higher the interest you will pay. The table above is only an illustration and can vary between banks. Banks usually offer lower interest rates on longer loan tenures. But this table helps us see how much a car loan actually costs. There are various factors to consider before applying for a loan. Some of the important factors to note are the principal amount offered, interest rate and interest payable, repayment tenures, service charges, and the total cost of the loan. Before applying for a car loan, it is wise to learn about the different factors that are involved with the loan cost and process. This will help you get the best deal that is suitable for you to buy the car of your dreams.