How to calculate car loan interest rate

Cars are purchased in India mostly through loans from banks or other financial institutions who disburse these loans. It is the task of the buyer to calculate the equated monthly installments (EMI) based on the rate of interest with loan tenure. He has to choose the particular rate of interest and the period of loan which will suit him most so that he can repay without much difficulty.
Any car loan has basically three components – the principal i.e. the actual loan amount, the rate of interest and the duration within which this loan has to be repaid. Now-a-days ready reckoners are available at hand to calculate on the spot the amount of EMI one has to pay. But before deciding on the amount to be taken for loan from the financial institutions certain points should always be borne in mind :
* Assessing your capability for repayment of loan : Loans are repaid in EMIs. The EMI consists of a portion of the principal amount along with the interest. In the early stages of loan recovery the interest part in the EMI is much more than the principal. It is only in the later stages that the principal amount exceeds the interest portion of the loan. However, as a general thumb rule the EMI should not exceed 40% of your income. Since the loan interest rates vary for banks EMIs will accordingly be different.
* Market survey: Since the banks offer varying rates of interest one must carefully explore the loan market. Normally two types of interest rates are given : the floating rate and the flat rate. The floating rate of interest varies from time to time due to various factors, the prime reason being Reserve Bank of India’s periodic monetary policy announcements. The flat rate of interest will be constant through out the loan duration and won’t fluctuate with the market.
* Tenure of loan : This is one of the most influencing factors in calculation of EMI. A higher tenure of loan will result in lower EMI but the interest amount will be higher.
* Processing fees, Pre-payment and administrative charges : Normally banks charge about 1 to 2% of the loan amount as processing charges. Also enquire if any pre-closure charges are to be paid in case you are able to repay part of the loan in lump sum installments later. Many banks do not ask for any pre-closure charges, so you should go for such options.