In today’s era, there are many great SUVs available in the market in the budget of ₹ 20 lakh. The craze for vehicles like Mahindra Thar is at its peak these days. Every middle class family dreams of having a new gleaming car parked in their courtyard. But, a big car loan taken without proper financial planning can take a toll on your hard-earned money and badly spoil your monthly budget. If you have also decided to buy a car worth Rs 20 lakh, then the superhit ’20-4-10′ formula of the finance world is no less than a lifesaver for you. This rule tells you how much down payment you should make for the car, how many years the loan should be and what should be the mathematics of your EMI, so that there is no extra pressure on your pocket.
What is the superhit formula of ’20-4-10′?
Financial experts always recommend solid planning before buying a car. This rule ensures that car hobby does not affect your household finances, children’s education or retirement fund. This formula is divided into three easy parts.
- First Part (’20’): You must pay at least 20% of the car’s on-road price as cash down payment from your own pocket.
- Second part (‘4’): The tenure of the car loan should be maximum 4 years (48 months).
- Third part (’10’): The monthly EMI of the car along with the maintenance expenses should not exceed 10% of your monthly salary.
Understand the complete calculation of a car worth Rs 20 lakh
Suppose you finalize a car with an on-road price of Rs 20 lakh. According to the rules, you will have to pay 20 percent of it i.e. ₹ 4,00,000 as down payment. By doing this your loan amount will reduce to ₹ 16,00,000. If the loan amount is less, banks easily give loan at better interest rates.
Now if the bank gives you a loan at an annual interest rate of 9 percent, then your EMI for a period of 4 years will be approximately ₹ 39,811. During this period you will pay interest of ₹ 3,11,000 to the bank. If you take a loan for 7 years in order to reduce the EMI, then the EMI may be ₹ 25,720, but you will have to pay ₹ 5.60 lakh as interest. You can directly save interest of about Rs 2.5 lakh on a 4-year loan.
How can low salary people fulfill their dreams?
Now the question arises that what should be the salary to pay this much EMI. According to the third rule of the formula (10%), your in-hand salary should be ₹4 lakh per month to afford an EMI of approximately ₹40,000.
If your monthly income is between ₹1.5 lakh to ₹2 lakh, then there is no need to despair. For this, you can increase the amount of down payment from 20 percent to 50 percent. That means deposit ₹10 lakh yourself. This will save the loan amount of only ₹ 10 lakh. Another option is to make the loan tenure maximum 5 years instead of 4 years to balance the budget. With this your EMI will reduce to ₹33,212.
Don’t ignore these hidden expenses in the budget
Often people calculate only EMI while buying a car. There are many other expenses associated with a vehicle. The expense of petrol-diesel or charging in the vehicle, the servicing done every 6 months, makes your pocket loose. Apart from this, for a car worth ₹ 20 lakh, an insurance premium (insurance renewal) of ₹ 30,000 to ₹ 50,000 also has to be paid every year. It is very important to include these ‘hidden expenses’ in your budget while doing your financial planning. Only proper planning can save you from financial crisis.
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