Managing Car Loan EMI: Here’s How You Can Do It Efficiently

Key Highlights:

• There are three factors that make up an EMI: principal, rate of interest and loan tenure. 
• The option of auto-debit or Electronic Clearing Service (ECS) provides a more straightforward, well-documented payment method and a track record. 
• Using part-payment and pre-payment options for your car loan can help you reduce EMIs or loan tenure and save money in the long run.

When you buy a car on a loan from a bank or another financial institution, its equated monthly instalment (EMI) becomes more of a commitment driven by discipline. To maintain a healthy track record of your financials and avoid stress, it is essential to manage and pay EMIs on time without fail.

To ensure you pay the EMIs of your car loan on time, you need to properly manage them by maintaining the right balance of loan amount, interest rate, and tenure, along with a few other aspects. Failing to meet any of these parameters can lead to penalties and a drop in your credit score, which hampers your creditworthiness and your ability to take on other loans in the future. 

Here, we will discuss the right strategies for managing your car loan EMIs effectively, ensuring a flawless credit history and a memorable car ownership experience.

Tip 1: Understand Your Car Loan EMI Structure

Before managing them properly, it is crucial to know how EMIs for your car loans are calculated. Based on the three primary elements – principal (the amount you borrowed), interest (the lender charges for the loan tenure) and tenure (duration of the loan), a car loan EMI is calculated using the following formula:

EMI = [Principal x Interest Rate x (1 + Interest Rate) ^ Tenure] / [(1 + Interest Rate) ^ Tenure – 1]

Tip 2: Create a Monthly Budget Around Your EMI

After you avail of a car loan, its EMI payments become a non-negotiable monthly expense, along with your usual living expenses. To make sure that payments are maintained and deducted without any hindrances, you can just incorporate some necessary changes in the planning of monthly expenditures.

• It is also advisable to maintain a surplus amount of three to six months' EMIs in your loan account, which will help you avoid stress in times of difficulty. At the beginning of every month, allocate a separate fund for your car loan EMI.
• If you are a working professional with a variable income, it is advisable to save more money in your higher-earning months. Following this practice will help you keep your car loan EMI payments unaffected, even during periods of lower income.
• Use a budgeting app like ‘Splitwise’ or maintain an Excel sheet to monitor your monthly expenses. It is a healthy practice that will help you prevent overspending on unnecessary things, while also making you aware of the contribution of your car loan EMI to your monthly expenses. 
• The widely accepted and proven 50-30-20 rule can be of great help in maintaining your monthly expenses: 50% for needs like rent, groceries, EMIs, and insurance; 30% for wants or desires like shopping, dining, travel, and entertainment; and 20% for savings and investments.  

Tip 3: Automate Your EMI Payments

The auto-debit feature, or Electronic Clearing Service (ECS) as it is known in technical terms, has become the norm for banks when issuing loans in the current times. ECS allows banks or financial institutions to deduct your EMI through an automated process from your loan account on a date pre-decided and communicated by them. As a gentle reminder to help you avoid penalties, banks and financial institutions send notifications on your smartphone or your email ID to maintain the required balance in your loan account before this pre-decided date of EMI deduction.

Tip 4: Using Part Payment or Pre-Payment Facilities

By offering part payments in fixed or unlimited instalments, depending on their internal policies, banks, NBFCs, and financial institutions are now giving borrowers the option to make partial payments according to their preferences. With part-payments, you can reduce EMIs or shorten the loan tenure, accelerating your path to financial freedom. Prepayment is also an option, in which you can foreclose the remaining loan balance for a small charge, with some banks even offering it at no fee. 

Tip 5: Avoid Taking Additional Debt

To ensure a smoother, well-calculated financial structure every month, avoid taking on any additional debt. It will help you maintain financial discipline. More unwanted loans or any other avoidable debt can hamper your repayment ability, which can also affect your credit score if the payments are not made on time. 

Key Takeaway

A person’s highest goal for the future should be achieving long-term financial stability and peace of mind with a good credit score, and for that, managing finances and loan EMIs is an uncompromised necessity. To maintain the EMIs of a car loan for a healthy track record, plan your monthly budget, make some smart moves and take the right decisions at the right time, which will also help you maintain a good credit score in the long run.

FAQs

1. How can I reduce my car loan EMI amount?
You can reduce the car loan EMI amount by exploring the options of part-payment and pre-payment, which will help you reduce the interest on your loan and, eventually, your loan’s EMIs. You can also make a higher down payment initially to keep EMIs as low as possible. 

2. What is the most innovative way to pay off a loan?
Some innovative ways to manage your car loan and pay it off properly include using part-payment and pre-payment opportunities, planning your monthly budget around your EMI, avoiding additional debts, and keeping a surplus amount in hand to help in times of distress. 

3. Is it smart to fully pay off a car?
While reducing interest by paying off a car loan early is a smart move for many, it might not be a smart thing to do if you do not have an emergency fund.