When Arya graduated from college and landed his dream job, the very first thing he wanted to do was to apply for a car loan. Being an automobile aficionado, all that he thought about after getting his first “salary credited to your bank account” message was to buy his dream car. Little did he know that a car is a depreciating asset. Three years later and with the car loan still being a monkey on his shoulder, Arya is now in a financially disorganized state.
Now, if you are asking us “What on earth is depreciation?”, consider this scenario – If you purchase a car now for X rupees, say an Alto or a Celerio, would you be able to sell it back for the same value X after three years? Take a look below at how we’ve done the math.
Yay! Arya buys a Car in 2009 – Rs.3 lakh
Three Years Later…
Value of the Car in 2012 – Rs.1,75,000 (after depreciation!)
Total Car Loan Amount, with Interest – Rs.3,98,000 (at 11% interest for a tenure of 5 years)
If you keep your car loan going for over 3 years, see what it amounts to with interest while your car’s value keeps coming down. If you feel the complexity of your car loan kicking in and your brain getting muddled, let us give you some tried and tested secrets that will help you clear the car loan in very little time.
Tip #1 – Can you really afford that car or that loan?
Are you being over enthusiastic about purchasing a car and planning to stretch your loan budget? Listen to us when we say do not go for a Benz A Class when what you can really afford is a Figo. If you want to know what you can comfortably afford, we suggest you use a car loan EMI calculator. Check if you are comfortable with the monthly EMIs and ensure that the loan does not put any extra financial stress on you.
Tip #2 – Know where to put your bonus money
If you are planning a trip abroad with you yearly bonus, think twice! Instead, use it to make part prepayment on your Car Loan. It’s advisable to do this whenever possible to bring down the interest amount. Be clear with your repayment schedule so you know what has to be done and how the interest accumulates with time. Aim to make one extra payment per year.
Tip #3 – Do you have a Strategic Spending Plan?
Be the master of coins and draft a financial plan, if you haven’t got one already. Just jot down your fixed monthly expenses (rent, Wi-Fi, electricity etc.), income tax payments and loan EMI payments also. Tally it in a way that your expenses are always lower than your income. Use this planner to decide when to make prepayments and also to save for an emergency fund.
Tip #4 – Don’t get a New Loan
After you buy a new car, you will definitely find a lot of aunties exclaiming, “Oh car! Get a new home also beta, will increase your prospects of marriage.” I repeat, don’t let that pressure get to you!, Never get new debt before you finish paying off an existing loan unless it is really, really necessary. Freeze your credit cards and stay away from pesky aunties!
Tip #5 – Take your car for a ride (Literally!)
In the process of paying back your car loan, do not forget to have fun. Go on long rides and roam around in that four-wheeled beauty so you feel that getting a car, even with all the loan and interest, was completely worth it!