Commercial vehicle loans are offered by many banks and non-banking financial companies (NBFCs) across India and are widely sought out by business owners desiring to add new vehicles to their fleets. These loans can be used to buy trucks, vans, buses, and more. Before applying for such a loan, you should have a good understanding of its important elements, which include:
- Principal Amount: This is the amount borrowed to purchase the vehicles needed for your business. The principal amount does not include the interest or any fees levied by the lender.
- Down payment: The upfront amount you pay to purchase the vehicles.
- Loan Term: The tenure or duration of the loan. EMIs are paid for this selected tenure.
- Rate of Interest: The interest rate on the loan charged by the lender.
Table of Contents
Reducing the rate of interest
Commercial vehicle finance interest rates are among the most key elements to take into account when searching for the right loan option. Today, the rate of interest for most commercial vehicle loans is calculated by reducing the balance. In this method, the interest is calculated based on the remaining principal amount after each repayment. As you make an EMI payment, the outstanding loan balance goes down.
The initial principal amount is set as you take out a commercial vehicle loan. Initially, the interest shall be calculated on this principal amount. However, as you make monthly loan repayments, a part of the money would go towards reducing the principal balance while the remainder covers interest charges. As a result, the outstanding principal is reduced with each EMI payment. The interest for the next period is calculated on the reduced principal amount, not the original loan amount. As interest is recalculated based on the reducing principal balance, the overall interest component decreases with every payment, resulting in lower interest payments over the loan tenure. This method allows borrowers to benefit from lower adequate interest payments over time in comparison to flat interest rate calculations.
Apart from the elements mentioned above, before applying for a commercial vehicle loan, you also need to check on the loan eligibility. Loan eligibility is calculated on the basis of the borrower’s income and repayment capacity.
