Car loan EMI: how term and rate change what you really pay

When comparing car loans, most people look at the monthly instalment. The more important number is the total you repay, and it changes a lot with the loan term.

Same loan, three terms

Here is a loan of 1,500,000 at 15% a year, repaid over different terms:

Stretching the loan from three to five years lowers the instalment by about 16,300 a month, but adds almost 270,000 in interest.

Why early payments are mostly interest

Interest is charged each month on the balance you still owe. At the start the balance is at its highest, so most of each instalment goes to interest. As the balance falls, more of each payment goes towards the loan itself.

Ways to pay less

• Make a bigger down payment. Every amount you don't borrow saves interest for the whole term.
• Choose the shortest term you can comfortably afford. Leave room in your budget for fuel, insurance and maintenance.
• Pay extra early. Part payments in the first year cut the most interest. Check whether your bank charges a fee for early settlement.
• Compare the full cost. Processing fees, compulsory insurance and other charges can make a lower rate more expensive overall.

If you are buying in Pakistan

State Bank of Pakistan rules set limits on car financing: a down payment of at least 30%, a total of Rs 3 million in car loans per person across all banks, and a maximum term of 3 years for cars above 1,000cc. Only cars up to 1,000cc can be financed for 5 years, so the 5-year example above applies to small cars only.

Islamic car financing

Many Islamic car financing plans use a rental or profit rate instead of interest. The monthly amount often works out in a similar way, so the calculator can still give a useful estimate. Ask your bank for its repayment schedule to see the exact figures.