Car loan: how much down payment and what tenure?

First, know what you are financing

Car loans in India are sanctioned on the on-road price: the ex-showroom price plus road tax and registration (which vary a lot by state), the first year's insurance, and sometimes a fee for the number plate or FASTag. Ask the dealer for an itemised on-road quote before you talk about the loan.

Accessories, extended warranty and add-on insurance covers are often added to the quote and then to the loan. Each of those is financed at loan interest for the whole tenure. Decide on them separately, and pay cash for the ones you want if you can.

Tenure: shorter costs less

An ₹8 lakh car loan at 9%:

A 7-year loan costs more than double the interest of a 3-year loan. Choose the shortest tenure whose EMI you can comfortably afford. Lenders commonly allow up to 7 years on new cars and less on used ones.

Down payment: every rupee down saves interest

A ₹10 lakh on-road price, 9%, 5 years:

Some lenders fund 90% to 100% of the on-road price, but zero-down-payment offers often come with a higher rate or fees, and they leave you owing more than the car is worth for years, as the next section shows.

Owing more than the car is worth

If your car is stolen or written off in an accident, the insurer pays its insured declared value (IDV). IDV is the ex-showroom price less a standard depreciation for the car's age, roughly 20% after the first year, 30% after the second and 40% after the third. The loan does not shrink that fast.

Take a ₹10 lakh on-road car with an ex-showroom price of ₹8.8 lakh, at 9%:

With a full loan over 7 years, a total loss after one year would leave you about ₹1,88,572 short: no car, and a loan still to repay. With 20% down over 5 years, the insurance payout covers the loan throughout. A return-to-invoice add-on narrows the gap, but it is another cost.

A simple budget rule

• 20% or more down, so the loan is smaller than the car's value from day one.
• 3 to 5 years of tenure at most.
• 10% to 15% of take-home pay for the EMI plus fuel, insurance and maintenance together.

On a take-home pay of ₹1 lakh a month, the 5-year EMI on ₹8 lakh is already 16.6% of pay, before fuel and insurance. That points to a cheaper car, a bigger down payment, or both, rather than a longer loan.

If you take a long loan, plan to pay it down

Sometimes a longer tenure is the only way the EMI fits this year. If you go that way, decide now how you will shorten it. Take the ₹8 lakh, 7-year loan at 9% and pay ₹1 lakh extra at the end of each of the first three years, from a bonus or an annual increment:

Before you count on this, read the prepayment terms. Car loans are mostly fixed-rate, so lenders can charge for part-payment or foreclosure, may allow it only after a lock-in, or may limit how often you can do it. A lender that allows free part-payments can be worth a slightly higher rate if you know you will prepay.

Watch out for

• Flat rates at the dealer. "7% flat" is really about 13% reducing. Convert it with the flat vs reducing rate calculator.
• Add-ons rolled into the loan: extended warranty, accessories or insurance financed at loan interest.
• Foreclosure charges. Most car loans are fixed-rate and may charge for closing early, often with a lock-in for the first months. Check the Key Facts Statement, and ask what the charge is before you choose a long tenure in the hope of prepaying.
• Tax claims you cannot make. Interest on a personal car loan is not deductible for salaried people. The Section 80EEB deduction applied only to electric-vehicle loans sanctioned between April 2019 and March 2023.
• After closing: get the NOC and remove the lender's hypothecation from your RC at the RTO (Form 35), and update your insurance.

Run your own numbers

Use the car loan EMI calculator with your on-road price and down payment, and compare dealer and bank offers with the loan offer comparison.

Frequently asked questions