Mastering Car Finance
Taking out a car loan is fundamentally different from a home loan. Because vehicles are rapidly depreciating assets (losing up to 20% of their value the moment you drive them off the lot), how you structure your financing is critical to maintaining financial health.
The Danger of Long Tenures
Dealerships often try to sell you on a car by focusing solely on the monthly EMI. To make a luxury car fit a smaller budget, they will extend the loan tenure to 7 or even 8 years. While this makes the monthly payment manageable, it dramatically increases the total interest paid and puts you at severe risk of being "underwater"—meaning you owe the bank more money than the car is actually worth.
The 20/4/10 Rule
Financial experts widely recommend the 20/4/10 rule for purchasing a vehicle:
- 20% Down Payment: Putting down at least a fifth of the purchase price ensures you aren't immediately underwater on the loan due to initial depreciation.
- 4-Year Maximum Tenure: Financing a car for no more than 48 months minimizes the amount of interest you pay on a depreciating asset.
- 10% of Gross Income: Your total vehicle expenses (including EMI, insurance, fuel, and maintenance) should ideally not exceed 10% of your gross monthly income.
Fixed Interest Rates
Unlike home loans which frequently use floating rates, car loans in India generally operate on a fixed interest rate. This means your EMI will remain absolutely constant throughout the entire lifecycle of the loan, making it easier to budget for.