How to Calculate Your Step up EMI to Buy a Bigger Car?

While driving your dependable hatchback, you are picturing a new, roomy SUV that suits your growing family and changing needs. After careful research, you’ve identified the perfect car and are ready to make the move. 

Opting for a larger car generally involves a larger loan, which might make financial planning seem complex. Fortunately, the Step-Up EMI is a solution crafted to ease you through this change. 

Step-up EMI is a loan repayment plan where monthly payments start off lower and increase over time. The main idea of step-up EMI is to adjust loan payments to fit the borrower's expected increase in income. At first, the borrower pays mostly interest, while larger payments towards the loan amount come later. The schedule for increasing EMIs is determined at the loan’s approval.

As a young professional, suppose you take a car loan of ₹20 lakh for 7 years with a step-up EMI plan. In the initial 2 years, your EMI could be ₹15,000 per month, primarily covering the interest component. As your salary increases over time, the EMI also increases to ₹20,000 per month for the next 2 years and then ₹25,000 for the remaining 3 years, gradually covering more of the principal component. This plan allows you to manage your finances better as your repayment capacity improves.

Here’s a step-by-step method to calculate your Step-Up EMI for a car loan:

Step 1: Determine your loan details

• Principal Amount (P): The total loan amount you need.
• Interest Rate (r): The annual interest rate on your loan.
• Loan Tenure (n): The total duration of the loan in months.
• Step-Up Interval (k): The frequency at which the EMI increases (e.g., every 12 months).
• Percentage Increase (i): The rate at which the EMI increases at each interval.
   

Step 2: Calculate initial EMI

Use the EMI formula to calculate the initial EMI:
EMI={P×r×(1+r)n} / (1+r)n−1   
Where:

• r is the monthly interest rate (annual rate divided by 12).
• n is the number of monthly payments.
   

Step 3: Estimate future EMI increases

If your car finance Step-Up EMI plan increases the EMI by a fixed percentage annually, you can calculate the future EMIs as follows:

• First EMI: Calculated using the formula above
• Second EMI: Multiply the first EMI by (1+i), where 'i' is the percentage increase in decimal form (e.g., 10% becomes 0.10).
• Third EMI: Multiply the second EMI by (1+i), and so on.
   

For example, if your first EMI is ₹20,000 and the increase rate is 10% annually, your EMIs for subsequent years would be:

• Second Year EMI: ₹20,000 × 1.10 = ₹22,000
• Third Year EMI: ₹22,000 × 1.10 = ₹24,200
   

Step 4: Calculate the total repayment amount

To find out the total amount you’ll repay over the loan tenure, sum up all the EMIs for each interval.
For a loan with an increasing EMI, you’ll need to calculate the total EMI payment for each period:

• Total for Initial Period: EMI × Number of months in this period.
• Total for Subsequent Periods: Add the increased EMI amounts as per the intervals and duration.

When you compare a Step-up Car Loan Scheme with a regular Car Loan, you will notice that the EMI you start with is considerably higher than the step-up scheme offers. So, buy your dream car with a comfortable EMI instead of settling for a smaller car with a higher EMI. With HDFC Bank, this EMI amount will increase gradually every year, but only by 11%.
Opting for a Step Up Car Loan Scheme from HDFC Bank? Click here to get started!

* Terms & conditions apply. Car Loan disbursal at the sole discretion of HDFC Bank Ltd. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.