Understanding the car loan amortization process!

By BankBazaar | July 12, 2013
Savings on your car loan!

Savings on your car loan!

While every borrower knows that a car loan will have to be paid back through a pre decided number of EMIs of a calculated value the exact breakdown of this EMI is what baffles most of the people. Whenever one takes a car loan and starts paying the EMIs on the same, a part of the EMI paid every month are allocated towards servicing the principal and a part towards the interest component of the loan. This division of the amount into principal and interest elements is called the amortization process. Most of the car loan borrowers are vaguely aware of this process but are not sure about the exact calculation process and the implications of this calculation.

The Parameters Needed

 

In order to calculate the breakdown of the EMI at that point of time, there are certain parameters that will have to be taken into account.

  • The Total Loan Amount
  • The Entire Tenure of Loan
  • EMI amount
  • Number of Installment paid.

The Information Provided from Amortization Calculation

 

The amortization calculation is an essential process for any car loan borrower since it provides some vital information regarding the status of the loan. It provides the following information:

  • The outstanding loan amount
  • The segregation between the principal and interest out of the total amount that has been repaid till date.
  • The segregation between the principal and interest components on the outstanding amount that has to be paid from that point of time onwards.
  • This provides a great insight as to when the loan will get over as per current schedule of repayment.

Importance of the Amortization Schedule

 

There are several benefits of creating and understanding the amortization schedule of the car loan:

  • This schedule indicates the current situation in your loan account giving an analysis of the amount left and time left.
  • The analysis provides insight into whether prepaying the car loan is within your limits or not.
  • The analysis also helps the borrower to decide whether it is a good idea to pre pay the car loan in between or continue with the pre decided EMI till the actual tenure of the loan.

(Note: In the initial EMIs the interest element is predominant and then it reduces as the repayment progresses. The principal element on the other hand increases progressively. When one prepays it is the principal amount is paid back to the lender)

Illustration

 

For a car loan amount of Rs. 500000/- borrowed at a interest rate of 13% for a tenure of 10 years (120 installments) the amortization schedule at the end of 4 years (48 installments) repayment will indicate:

EMI amount: Rs. 7465.54

% of Principal paid: 36

% of Interest paid: 64

Outstanding amount: Rs. 371899/-

% of Principal Remaining: 69

% of Interest Remaining: 31

The 48th installment will have the following components:

Principal: Rs. 3399.80

Interest: Rs. 4065.74

Thus knowing the exact status of the remaining car loan is a helpful guide for the borrower to make a smart decision regarding prepayment of the existing car loan.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

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